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

Creating a family budget can help you rebuild your emergency fund, dollar by dollar.

by Julie Anne Russell | June 21, 2021
<p>A house made of dollar bills on a red background</p>

Your emergency fund exists so you don't get sent off the rails in the case of unexpected home repairs and the like — here's how to get it back to flush.

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.
  • Create a budget that prioritizes your emergency fund as your No. 1 financial goal — and consider what you’ll really need to care for those who depend on you.
  • Start someplace with whatever amount of money you can. Any amount of savings is better than nothing.

When it comes to savings, there's a reason so many financial advisors tell their clients that building up an emergency fund should be a top priority. Emergencies, by definition, can't be foreseen. However, their financial impact can be mitigated by having dedicated savings at hand, whether that money helps pay for but unexpected home repairs, a trip to the ER, or a sudden loss of income.

 If you’ve dipped into your emergency fund — or depleted it entirely — your know how emotionally and mentally deflating it can be to think about building it up again, especially when life has only gotten more complicated as the pressures of financing your kid's college education, saving for your retirement, and helping out your parents loom.

 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. She points out that using your emergency fund protected you from creating two ugly 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 get back to saving. "The lesson from that experience of using your emergency fund is that you need an emergency fund," says Frazier. "Now, it's just about building it back up." 

So, how do you go about rebuilding your emergency fund? We’re glad you asked.

 Set the 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 towards any other goal.

 Determine how much money you'll need 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. With two sets of dependents bookending them, the Sandwich Generation might warrant some extra savings. "How many people are you caring for?" Frazier points out. "If you have children and parents you're taking care of, that's extra financial responsibility and extra expenses. You have to make up for and supplement in 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 lose track of the funds. Instead, open a separate savings account for your emergency fund. If you're saying to yourself, "but it's not going to earn much money there," well, you're right — but 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 and it doesn't lose money," says Frazier. A dedicated high-yield savings account can give you the optimal interest rate while meeting those criteria. Money invested in the market could lose value, by contrast. 

Build a family budget

To fill that savings account, you might need to 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, if you're already in the mindset of cutting out unnecessary expenditures, stick with it. Then make your emergency savings fund — however much you've designated to save each week or month — a line item in your family budget and fund it first. "Use automated savings to send that money right into the dedicated account," says Frazier. "If it goes straight into savings, it's not an option 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.œ Maybe you don't need a second car; if you're working from home, perhaps you can cut back on childcare and get Mom or Dad to watch the kids instead. "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? Certainly, don't give up on them, says Frazier, but consider how to distribute funds to get that emergency fund back to comfortable levels first. After all, if you don't have an emergency fund and you fall back on credit cards or other costly forms of debt, you're more or less sabotaging those other financial goals. "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. If six months of savings feel impossible, start with a month. Hit that goal, and keep going. "It's especially important for people who are struggling financially not to be intimated by an emergency fund," says Frazier. "Start someplace with whatever amount of money you can. Whatever you can is better than nothing."


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About the Author

Julie Anne Russell is a Brooklyn-based writer whose work has appeared in Marie Claire, Fast Company Works, Visit California, My Ford Magazine, and numerous publications devoted to personal finance and business.

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