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Should You Be Reluctant to Use Your Emergency Fund?

Sometimes it’s tough to tell what constitutes an emergency. When should you use your emergency fund and when should you look for other options? In general, use your emergency fund, only when you can’t avoid it, but before going into debt.

Should You Be Reluctant to Use Your Emergency FundThe goal of having an emergency fund is two-fold. For one, your emergency savings can replace your income (at least for a few months) should you lose your job. But an emergency fund has another equally-important function: to allow you to pay for large, unexpected, and unavoidable expenses without incurring debt or borrowing from other savings accounts (e.g., college funds or retirement plans). With the focus these days on the economy and job losses, everybody’s so intent on protecting their emergency fund in case they lose their job, they may be more willing to save instead of pay down debt, or even pay for an unexpected expenses from other sources like credit cards. Is this smart? Consider this example I received from a 28-year old reader:

I need $2,000 to retain an attorney for an upcoming child custody trial and between $1,000 and $2,000 more for all of the anticipated legal expenses. Here is my financial status:

  • $2,100/month net salary
  • $10,000 in low-interest credit card debt (under 5%)
  • $70,000 mortgage ($59,000 remaining balance)
  • $1,200 in an emergency savings account
  • $1,300 in a 529 savings account
  • $6,000 in a Roth IRA
  • $13,000 in a 401(k)

What’s my best route for coming up with this money? I’ve considered several options including a home equity line of credit, home equity loan, borrowing against my 401k, and a personal loan. I’ve also thought about cleaning out my emergency fund, but in the current economic climate, I’d rather leave that alone. I could also clear out the 529 savings account, since I have only just started and I have many years before that will be required.

Although this reader’s financial snapshot isn’t bad, especially in today’s economy and for being 28; you can see the pickle he’s in. His emergency fund is low, and draining it won’t cover the entire cost of this unexpected expense and will leave him vulnerable should he lose his income.

What are his options? Since rates are low, you could try for a home equity loan or line of credit and it wouldn’t be the worst idea. The only problems I foresee, however, is getting approved in today’s tough credit markets and that banks may not see the $11,000 in equity you have to be enough for a loan. Borrowing against a 401(k) is rarely a good idea since the loan comes due should you leave your job, meaning you’ll have to pay taxes and penalties if you can’t immediately repay the balance. Similarly, although you just started the 529 savings account, you would also have to pay taxes and a 10% penalties on an early withdrawal, so that $1,300 turns into more like $900.

Another option you have is withdrawing some principal from your Roth IRA. One of the beauties of Roth IRAs is that you can withdraw money you contributed to the fund anytime without paying taxes or penalties. Of course, you’ll also be sacrificing earnings during that time.

What I would do. I would lean on that Roth IRA for peace of mind in case you lose your income. I would drain the emergency fund for these legal expenses and look for other ways to come up with another $800 for the rest of the retainer. Anything around the house you can sell? Some part-time work you can pick up? You can even try negotiating with the attorney to see if he’ll set the retainer at $1,500 while you come up with extra funds. Then, slash your budget and/or pick up extra income to rebuild your emergency fund and pay for the additional legal expenses. In the worst case scenario, all of the options you mentioned are available to you, but my guess is you can get this expense paid for (and your emergency fund built back up) without touching your other finances.

What do you think? Would you drain your emergency fund to cover a big expense despite the economy or would you look at other options? What do you recommend this reader do? Let us know in a comment.

Published or updated on May 11, 2009

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


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  1. BT says:

    I probably don’t do what I “should”, but I also keep a small balance on my credit card even if I have the money in my savings to cover it. I guess it’s just a psychological thing with me. I look at the two as totally different. I always pay myself each month to build up my savings, and if a large expense occurs I pay what I can within my budget even if it means keeping a small balance on my credit card. I have built up close to 8 months of living expenses in my emergency fund, but still carry a small balance (less than 1,000 dollars) in credit card debt. The only way I’m tapping into my e-fund is if I lose my job, or have a major expense with my house.

  2. Hey Jason, You raise a great point about how to keep “paying yourself first” even when you’re faced with a big unexpected expense. Although it seems counter-intuitive, I think what you’re doing is the best course of action: actually transfer money out of savings to cover the expense (and leave your auto “self-payments” alone for the month). The net result might be the same; but you keep the habit of paying yourself. I would probably still be reluctant to leave a balance on the credit cards unless you had a 0% intro APR. Anybody else agree or think differently?

  3. John Hunter says:

    I would be reluctant to withdraw all the emergency fund at this time. I would rather get a small loan. But I think using the emergency fund is an ok option too. I would try to cut done expenses then to build back up the emergency fund (and increase it) – or to pay off the small loan. Or use a part time job to pay off loans or increase the emergency fund.

  4. Jason says:

    In regards to the above question, I personally might take it from one of the retirement accounts, like you suggest. Given that he’s only 28, he has time to make it up, and the emergency fund in this case is just too small. If his emergency fund was any bigger, then it’d be a no-brainer but in this case I’d say use the Roth IRA, and possibly kill off the 529 savings account, especially if it’s not part of any active contribution plan right now.

    Separately, this is a bit off-topic, but I’m kind of curious:

    Dave, in the past you’ve extolled the virtues of “paying yourself” at the same time (or before) you pay your bills. I’ve long believed in this too, so I have set up an automatic withdrawal to my online savings account for the same day as each payday. I view this like a bill, so that I keep making it except in exceptional times (like around a big move, for example).

    However, inevitably there will be months with a big expense when I don’t have quite enough to cover my credit card bills (where I stash most expenses). Typically, what I do is I just draw off of that savings account to make up the difference, but keep plugging ahead with my savings plan.

    However, since you should “pay yourself first,” do you think that I should actually carry a small balance on the card before I withdraw from my savings account. Financially, this obviously doesn’t make sense, I just don’t know if there’s some greater psychological benefit to doing it differently. I suppose one other option is keeping a bigger cushion in my checking, but that seems like an even bigger waste of money since it is really not doing anything.

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