Why Aren't People Using Their Emergency Funds for Actual Emergencies?
There’s a pretty peculiar issue many people face when it comes to their emergency funds, no matter how ample: fear of withdrawing from it, even when a legitimate emergency arises and you have the cash to cover it. Like so many financial fears, this is totally valid, but it’s also not serving you whatsoever; in fact, refraining from using your emergency fund could seriously set you back.
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After all, if you don't use your emergency fund for emergencies, what's it for? If you fear losing its coverage, your response is likely to invoke the exact situation you're trying to avoid.
We talked with financial experts to learn why we may be reluctant to dip into our emergency funds, why holding back here can hurt you and when you should feel safe withdrawing from it.
A Lot of Reluctance Comes From Emotion
Nicole Carlon, financial advisor at WiseOak Wealth, LLC, regularly sees people hesitate to use emergency funds when they actually need them. She finds that the root cause of this hesitation is tied around emotions, not logic.
“People work hard to build that savings and once it’s there, they don’t want to see the number go down,” Carlon said.
Emotions are powerful things, but do they align with sound judgment? Often they don’t. So you need to detach from what you feel, to an extent, so you can think clearly and adhere to logic.
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What Distinctly Qualifies as an Emergency?
What qualifies as an emergency that is worth drawing from your on-hand reserve?
“A simple way to think about it is this: An emergency should be unexpected, necessary and time-sensitive,” Carlon said. “Job loss, medical expenses or urgent home and car repairs fit that definition.”
Avoiding Your Emergency Fund Can Cause Crippling Credit Card Debt
To leave your emergency fund intact, many people turn to other ways to cover the emergency expense. Usually this means using credit cards — and that’s really risky, often resulting in a financial setback or full-blown crisis that could have been totally avoided. We often fear losing our emergency fund's protection while ignoring that this exact scenario is what it's meant to protect us against.
“Someone will have the cash available but choose to put a few thousand dollars on a card at a high-interest rate because they want to preserve their savings,” said Ashley Morgan, attorney and owner at Ashley F. Morgan Law, PC. “That balance can sit there for years and will cost significantly more than the original expense.”
The better approach: Replenish your emergency fund after the initial expense with future income you just rescued from credit card debt.
“It likely would have been more cost-effective to use the emergency fund for the expense and pay a small amount into replenishing the emergency fund each month,” Morgan said.
But Sometimes a Credit Card Actually Does Make Sense
Turning to a credit card when you have enough cash is clearly risky, but there are times when it makes sense, particularly if your emergency fund covers under six months of living expenses.
“If you have a true zero-percent promotional period and your emergency savings are in a high-yield account, you could use the card and keep the savings intact,” Carlon said. “But that only works if you have a clear plan to pay it off before that rate expires. Without that structure, it can backfire quickly.”
Of course, if you can use the card to pay the costs and then pay it off immediately from the emergency fund, you'll likely save a small percentage overall.
Avoiding Your Emergency Fund Can Make Your Emergency a Lot More Expensive
The bottom line: Not using your emergency fund for emergencies is a dangerous game that could make your emergency even pricier and more complicated in the long run.
“At a certain point, not using the emergency fund can lead to situations that are much harder to fix, including collections, lawsuits or even bankruptcy,” Morgan said. “The cost of protecting savings can be outweighed by the expense of new debt. The people who tend to do better long term are not the ones who never touch their savings.”
Have a Plan To Rebuild Your Emergency Fund
If you’re the type to refrain from taking from your emergency fund for whatever reason, you can get comfortable with the idea by having a realistic, simple plan to rebuild the fund.
“Know what you’ll need to do to replenish whatever savings you spend,” said Benjamin K. Garcia of BOK Financial Advisors. “Plan to increase the amount you regularly contribute to your savings. If necessary, consider taking on a side hustle and redirecting that extra money back into your emergency savings.”
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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