Is Now the Time to Drain My Emergency Savings?

During a financial crisis, some people may consider taking out loans, applying for credit cards, or refinancing their homes to help cover monthly expenses. They may even dip into their emergency savings account –- but is this wise?

To drain or not to drain your emergency savings

Financial experts say whether or not you tap your emergency savings depends on your specific circumstances and how exactly you’re spending your money.

In general, financial advisers recommend having three to six months worth of living expenses in an emergency fund for unanticipated circumstances. However, the reality is much different from the rule of thumb: Many people struggle to find money for a $400 unexpected expense without turning to their credit card for assistance.

If you are someone who has a fund of any size in place for financial emergencies, such as car repairs, medical bills, or in this case, unexpected income loss, when is the appropriate time to tap into it?

According to financial literacy educator Deborah Sawyerr, a true emergency may be the right time to use your emergency savings.

“Emergency savings are for these types of rainy days. I would absolutely recommend that they dig into their emergency savings for times like this,” she says. “This will minimize worries like, ‘How will I cope financially or how will I be able to afford to pay for my bills?’”

Marlene Schmidt, a certified spending planner at Insight Spending Planners, says it’s important to hold on to whatever cash you have:

“Before you withdraw money from your emergency savings, ask yourself, ‘Do I need to spend this money right now?’ There are plenty of expenses that may seem important, but are they worth risking your ability to weather the storm?”

Beef up your emergency savings

If you’re adamant about not touching your emergency savings account, there are ways to build it up instead. According to Schmidt, you should take the following steps to get a handle on your income and expenses:

1. Write down your income resources. Sit down and take stock of all your financial resources, including your wages, bonuses, overtime, savings and investment income, and child support payments.
2. Write down your income amounts. Record how much money is coming in and when; if you don’t have a regular income, figure out an average amount.
3. Create an emergency budget. Only include things you need to survive, like housing, food, health insurance, utilities, car insurance (if applicable), and your phone; analyze your needs versus wants, and cut any discretionary spending.

Schmidt says you should contact your creditors to see if you can skip or defer payments. However, make sure any options they give you won’t negatively impact your credit. You can also ask companies you pay on a regular basis –- like utilities, mobile phone and insurance companies –- if you can reduce the amount you pay.

Cancelling unused or unnecessary subscriptions is another way to stash away or divert extra cash into an emergency fund or your checking account, if you are just trying to find enough money to get by.

Avoid rash decisions

Schmidt says if you’re bringing in significantly less money (or none at all) and “you’ve done everything you can to reduce your expenses, it could be time to turn to your emergency savings.” However, stop to consider all your options before making any major financial decisions.

“You may be tempted to borrow to pay bills, but it’s advisable not to take on new debt,” Schmidt says. “Unless your situation turns around quickly, more debt can create bigger problems.”

You should also try to be as calm as possible and not make any rash decisions about your finances right now. “I would say that people should exercise some patience just for a little longer until push comes to shove,” Sawyerr says. “If the going gets tough, they can begin to look into using whatever means are available to them.”

The bottom line

Along with taking these steps, make it a goal to get your finances in order as much as possible. Then, you can focus on what matters most in life, especially in a moment of crisis.

“Now is the perfect time to take charge of your finances so that all you have to worry about is staying safe and healthy,” Schmidt says. “Taking action on what is within your power to control is the best way to alleviate financial stress and build resilience to see you through these tough times.”