Why Using Your Emergency Fund Isn't Bad — and How to Build It Back

The Squeeze

• Dipping into an emergency fund — or depleting it entirely — can be emotionally and mentally deflating. But using your emergency fund just shows how much you need an emergency fund.
• Step 1 to getting it back is to create a budget that prioritizes your emergency fund as your No. 1 financial goal.
• Start saving with whatever amount of money you can — because any amount of savings is better than nothing.

Emergencies, by definition, can't be foreseen. But we all should expect that some kind of financial surprise will happen to us at some point — a washing machine breaks, a trip to the ER, a sudden loss of income — and plan accordingly. (Hoping bad things won't happen isn't actually a plan.)

If you’ve dipped into your emergency fund — or depleted it entirely — you know how deflating it can be to think about building it up again. But there's good news hidden in here. (Really.) "If you had an emergency fund, and you've had to use it — well, that's what it was there for," says Liz Frazier, CFP, author and director of financial literacy at Copper Banking. The good news is that using your emergency fund protected you from creating two ugly, and expensive, forms of debt: credit cards and high-interest loans. 

You deserve a round of applause for warding off that debt. So, take a deep breath — and then make your plan to get back to saving. Here's how:

Set a single-minded goal

This money is for emergencies and nothing else. "All emergency funds are savings, but not all savings are emergency funds," Frazier points out. You put aside this money and do not use it — or even think about using it — for any other goal. Financial security is priceless. 

Determine how much money to stash away

Conventional wisdom advises you save 3 to 6 months of living expenses, but some people might need more, depending on their situation. If you happen to be a caregiver who has your eyes on two sets of dependents — your kids, your parents — you might consider setting aside extra savings. "Extra financial responsibility equals extra expenses," says Frazier. "So you have to make up for that and supplement your emergency fund.”

Create a dedicated place for your emergency fund

This money shouldn't be swirling around in a savings account also used for vacations, college tuition, or anything else. You might be tempted to use it — or even lose track of the funds. Instead, open a separate savings account for your emergency fund (or use the Savings Goal feature in the Firstly app, which you can read more about here). 

Don't get distracted by what interest you are or are not earning on this savings account — that's not the point. "The goal of an emergency fund is to have the money available when you need it, so the most important things are that it's liquid" — i.e. instantly accessible — "and not losing money," says Frazier. A dedicated high-yield savings account can give you the optimal interest rate while meeting those criteria.

Build a family budget

To fill that savings account quickly, you should build a new, leaner budget for you and your family. That's a habit that many of us may have honed during the pandemic, as economic stressors and widespread job loss — and fear of job loss — caused many of us to rethink our savings and spending. "If there is a positive of the pandemic, it showed us the importance of really looking at our budgets and getting them down to needs versus wants," says Frazier. So, take a good look at your budget — and if you don't have one, just open up your bank account and look at your last 6 months of spending — and look for how you can narrow your discretionary spending and put it toward savings. Make your emergency savings fund a firm line item in your family budget and fund it first. "Use automated savings," recommends Frazier. "If the money goes straight into savings, you're less likely to spend it."

If, after going through discretionary spendings, like eating out, subscriptions, and shopping, you can't find extra money to sock away —  it's time to take a hard look at fixed expenses and see what can be cut Maybe you can get by without a second car, or cut back on your cable TV costs, or become a coupon king at the supermarket. "It's all about prioritizing," says Frazier. "The emergency fund needs to be a top priority."

Manage competing financial goals

What about retirement and other worthy savings goals? The answer is simple: get that emergency fund back to comfortable levels first. After all, if you don't have an emergency fund and you are forced to fall back on credit cards or other costly forms of debt, you're more or less sabotaging those other financial goals with high-cost interest. "If you have to use a credit card or a loan to pay for an emergency, that's going to push back retirement savings anyway," she says. "Your emergency fund should really be at the top of the list."

If you're feeling overwhelmed by rebuilding your emergency fund, remember it's okay to set the bar low and just get yourself started. "It's especially important for people who are struggling financially not to be intimated by an emergency fund," says Frazier. Six months of savings feel impossible? Start with a month. Then celebrate when you hit that goal (and no, not by going out to dinner) — and just keep going. "Start someplace with whatever amount of money you can," says Frazier. "Because no matter what, whatever you can is better than nothing."