Emergency fund: When is it time to use it?

Most personal finance experts will tell you to set aside three to six months of living expenses to cover emergencies. But how do you decide what qualifies as an emergency?

Most of the time, the question is easy to answer. A new iPhone is not an emergency. A weekend trip to Montreal is not an emergency. Fixing the scratches on your car, or getting new seat covers is not an emergency. However, if you get into a car accident, paying for the insurance deductible or buying new transportation would probably be a case where you would use your emergency fund.

But what if your $2,000 Macbook Pro dies? Is it considered an emergency to replace it? What if you get an unexpected invoice in the mail, or you know you won’t be able to pay your cell phone bill this month?

Here are four questions to ask   before you use your emergency fund: 

1. Can you cut other expenses?
Take a hard look at your budget. What can you go without?  A few small sacrifices may mean you can cover unexpected expenses, but won’t have to take the money from your emergency fund either.

2. Is it really an emergency?
There are often temporary solutions that will allow you to keep functioning until you have enough money to replace an item, or pay for an unexpected bill. You might be able to get an interest-free grace period to pay off the bill, or if your laptop dies, you could borrow one until you’ve saved up enough money to replace it – or you could use the computers at the library in the interim.

3. Is there a substitute?
Can you repair the item, or have someone do it for you? Do you have a skill that you can barter  in order to cut down the cost of the repairs? There are plenty of ways to decrease the cost of most emergencies. For example, if you don’t absolutely need a top-of-the-line Macbook Pro, consider replacing it with a less expensive laptop, or buying one refurbished.

4. Can you increase your cash flow?
 Are there other ways you can increase your income? Taking on extra hours at work, selling unwanted possessions, or finding a temporary job might get you through your emergency situation, without having to dip into your savings.

When I lost my job in March 2010, I was devastated. But despite having only $3,000 in my emergency fund, I wasn’t worried. My plan was to take on a part-time job to make my emergency fund last longer. Having a part-time schedule helped me keep regular hours while still having the time to search for jobs and go on interviews. 

 I'll do whatever it takes not to dip into my savings. The key for you is to decide early on what your emergency fund is for – and stick to those rules.

When would you use your emergency fund?

Also read:
Should you rent a spare room to tourists? 
Here’s how I juggle three jobs 

Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks. You can reach her on Twitter (@krystalatwork), or by e-mail at krystalatwork@gmail.com.