The Right Time to Tap into Your Emergency Fund

It's a sound financial practice to have an emergency fund. Keeping a separate savings account with at least $1,000 in it will help protect you when you face unexpected expenses (having three-to-six months' living expenses saved is ideal). Funds in this account should cover true emergencies – moments when you have no other choice but to spend money to address the problem. But when is the right time to spend those "just-in-case" dollars? Here are a few questions to consider:

Do you need to spend, or do you want to spend? Before you dip into your fund, take a good moment to consider what you're spending the money on. For example, if your car needs repairs, it's perfectly okay to use your emergency funds to fix the problem. It might not be as wise to use those dollars toward a down payment for a brand new car. Fixed car? Need. New car? Want.

Is this unexpected? A job loss, car repair, or trip to the hospital can throw your budget into a tailspin. These are certainly times when using your emergency fund is warranted, whether it's to pay bills while you look for new work, or cover the repair so you can get where you need to go.

On the other hand, it's important to anticipate necessary expenses that may only come up a few times a year, like birthday gifts or back-to-school shopping. These are not emergencies unless you have failed to prepare. We recommend budgeting in a separate account for "likely-to-occur" events, so you won't be caught off guard when your little one comes home with another class birthday party invitation.

Is this urgent? Again, medical emergencies, a car that doesn't work, or a water heater that gives out are all-cause for immediate spending. But other instances are less cut and dry. Maybe you've already had your washing machine repaired several times, and the repair people have warned it's about to give up for good. Instead of taking a wait-and-see approach, start saving for this specific purchase now so you don't have to touch your emergency fund when the inevitable happens.

Do you have another means to pay? The emergency fund is your last resort. So in the event of an unexpected expense that will affect monthly cash flow, look at other areas of your budget that you can divert to the problem.

Do you typically set aside $300 for dining out each month? Are you saving a little each month for a cruise next year? If possible, shuffle those funds to cover your immediate need so you can keep your emergency fund intact. You might have to dine in more for a few weeks or push out the date of your vacation, but you won't have to work as hard to replenish what you pulled from your emergency stash.

If you don't want to interfere with your regular monthly cash flow, a credit card is another option to consider. Just understand that you'll be paying interest on top of the actual emergency expense – so you'll pay more in the long run. Apply for a credit card with the lowest fees and interest rate possible, and give yourself a plan for paying it off as quickly as you can.

Remember: if you have to use the emergency fund, it's okay! It's there for a reason. Just be sure to spend it wisely.