Here'€™s the Problem With 'Emergency' Funds
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It’s classic money 101 advice: Save three to six months’ worth of expenses in an emergency fund. That way, when an unexpected bill comes your way, you’ll avoid going into debt or, worse, tapping your retirement account (thus triggering penalties and taxes).

Yet there’s a lot of research indicating Americans aren’t saving. Recent surveys have found that anywhere from about one-third to nearly half of Americans don’t have any money stashed away.

And of those who’ve managed to save something, more than one in 10 have less than $1,000—better than nothing, but nowhere near the recommended amount. Why?

“A primary reason people don’t save for emergencies is that they believe it won’t happen to them,” says James Roberts, a Certified Financial Planner and president of RT Wealth in Washington, D.C.

And that’s the problem with the label “emergency fund.” If you’ve never been in the ER or the unemployment line, you might think that the chances of you ending up there are slim enough to take your chances—especially if your budget is tight.

But the kinds of unexpected expenses you might cover with emergency funds are often nowhere near as disastrous as those. There are plenty of situations in which having savings can, well, save you from going into debt or getting into serious financial trouble. “‘Emergencies’ happen every day,” says Roberts.

Here are five reasons you may need to tap your fund (and reminders of why it’s so important to build one up).

An Emergency Expense… Is Anything You Can’t Afford to Delay

The simplest definition of an emergency is a short-term financial problem that has to be handled immediately, says Pamela Capalad, a Brooklyn-based Certified Financial Planner and owner of Brunch & Budget.

But it can sometimes be tricky to decide what fits the bill. If you live in a part of the country where it snows a lot, for example, your snow blower kicking the bucket in the dead of winter constitutes a legitimate reason to dip into your emergency fund. It’s a different story, however, if it stops working at the end of the season. When there’s no urgency, it’s best to leave your emergency fund intact and save up to cover the expense.

Howard Hook, a Certified Financial Planner with EKS Associates in Princeton, N.J., says there’s one more layer to figuring out whether an expense is emergency-fund-worthy. “The key word is ‘unexpected.’ Knowing that your quarterly property tax bill is coming due, for example, would not be something I would recommend using an emergency fund for.”

An Emergency Expense… Jeopardizes Your Health

You never know when you’re going to chip a tooth on a chicken bone, break a toe playing softball or be exposed to the flu by sick coworkers, so there’s no guilt in tapping into an emergency fund to cover costs related to health crises. After all, good health is priceless—but the average cost of an ER visit is a whopping $1,233. (Of course, this can be lower depending on your health insurance coverage and deductible.)

What doesn’t equal an emergency medical expense? Non-essential procedures like Lasik eye surgery or teeth whitening. “Saving for an elective procedure is along the same lines as saving for anything else in the long term,” Capalad says. Create a timeline and stash away a little at a time until you’ve set aside enough to afford it.

An Emergency Expense… Affects Your Physical Safety

From repairing a roof to replacing your car’s brakes, home and auto repairs are often pricey and hard to predict. According to a HomeAdvisor survey, the national average cost for a roof repair is $679. And a report by the U.S. Bureau of Labor Statistics shows that the average annual expense for repair and upkeep of vehicles for U.S. households was $537 for 2012.

“Unexpected home or auto repairs that need to be done for reasons of safety or in order to continue working and living comfortably should not be put off,” Hook says. “However, redoing a kitchen, re-siding a house, or financing other home or auto ‘upgrades’ would not be good use of emergency funds.”

A few other examples in this category: Maybe you missed your stop on a 3 a.m. train, and need to take a cab back to your apartment. Or perhaps that tall oak tree in your backyard has a dying branch that you know will fall off one day. Calling a pro will cost you, but leaving it could cause damage to you or your loved ones. An emergency fund can bring welcome peace of mind in potentially uneasy situations like these.

An Emergency Expense… Threatens Your Financial Stability

Job loss is probably the most commonly cited financial emergency, and with good reason. A solid savings is designed to float all your expenses—from housing to food and debt payments—for as long as it takes to land another gig.

If you work in an industry that’s particularly susceptible to layoffs, it’s a good idea to aim for even more than the recommended three to six months’ worth of savings. (Hook cites sectors like energy, print media, advertising, retail and construction.)  

Maybe you’re self-employed, freelance or depend on your own home equipment to get your work done. If your laptop crashes and has to be replaced, tap that emergency fund, guilt-free. The same goes for when your cell phone falls into the toilet, if you’re someone who manages sales or otherwise relies on your phone to earn money.

Again, the trick is to discern the difference between a want and a necessity. If you just want a new laptop or the latest smartphone, but don’t actually need it, don’t waste your funds and save for a replacement instead.

An Emergency Expense… Requires Short-Term, Long-Distance Travel

It’s a sad, but inevitable part of life: Sometimes friends and family get sick or pass away. If your loved one lives far away, the cost of last-minute travel can be particularly pricey. Between airfare, accommodations, meals and time off from work, you could easily be looking at a multi-thousand-dollar hole in your budget.

“When tragedy occurs in a family or close group of friends, finances should be the last thing on your mind,” Roberts says. “The inability to visit with loved ones who may not have long to live, or who desperately need and covet your presence in their most vulnerable times in their life, should scare anyone from putting themselves in that position.”

That said, don’t confuse this type of emergency for other types of travel. A destination wedding, new birth in the family and trips with friends are generally planned months in advance, and don’t qualify as reasons to dip into your emergency savings.

To afford trips like these, save money in a separate account from your emergency savings. “By setting aside money for emergencies while you’re also saving for long-term goals, you know you’ll be okay if something were to happen tomorrow—and you also know that you’re steadily saving toward an exciting milestone in the future,” Capalad says.

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