Published in: Banks | Nov. 12, 2019

7 Bad Reasons to Tap Into Your Emergency Fund

By:  Lyle Daly

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It's easy to stretch the definition of the word "emergency."

When you've been putting money away towards an emergency fund for over a year and you finally have it fully funded, you probably think that the hard part is over. As you'll soon learn, that couldn't be further from the truth.

Saving for an emergency fund is certainly a challenge, but there's something just as difficult that comes after -- reserving that money for actual emergencies.

A hand holding a hammer over a worried-looking piggy bank.

Image source: Getty Images

Consumers often find themselves tempted to withdraw from their emergency fund any time they could use the money. If you're thinking about tapping into yours for any of the reasons below, then you should reconsider.

1. A down payment on a home

Given how long it takes to save a down payment on a home, it's obvious why you'd consider using your emergency fund to shorten your wait. But one of the worst times to reduce your emergency fund is when you're about to become a homeowner.

New homeowners often find that there are many early expenses they hadn't thought about. And once you own a home, you'll need to pay for emergency repairs any time something breaks. An emergency fund could prove very useful once you've bought your own place, so you don't want to sacrifice yours on a down payment.

2. A vacation

A vacation can be good for the body and mind, but that doesn't mean it's a worthy use of your emergency fund. If you're going to take one, you should cover the cost with money you've saved for that purpose or through travel points. You'll enjoy it much more knowing that you didn't need to put yourself at financial risk to pay for it.

3. Shopping

Whether you're gift-shopping for someone else or buying something for yourself, you should pay for your purchase with your disposable income. If you know that you're going to need to do a lot of shopping at once, then it's smart to set up a savings account and save for it in advance. For example, you can start a holiday fund at least a few months before Christmas to help you save for the gifts you'll buy. 

4. Expected vehicle and home maintenance

Vehicle and home maintenance can fall under the definition of emergency expenses, but it depends on the circumstances.

If your car breaks down or your washing machine stops working, both would be good reasons to use your emergency fund. They were issues that you couldn't have reasonably anticipated.

On the other hand, if your car needs new tires or your home needs a new roof, it's a different story. Those are expenses you know about well in advance. Tires wear out, as do roofs. That means you should be saving for these situations before they happen.

5. Upgrading your tech

As much as you may want the latest smartphone, laptop, or tablet, upgrading your tech is usually more of a want than a need. And even if you do need a more advanced product, you can always save for this. Many retailers also offer trade-in programs, so you can at least reduce your costs by swapping your old item for a new one.

6. Paying low-interest debt

Whether you should use your emergency fund to pay debt is a common question. On the surface, it might seem to make sense. Your emergency fund is in a bank account that almost certainly earns a lower interest rate than the interest rate on your debt.

But you also need to consider what you'd do if you had an emergency expense after paying off that debt. In all likelihood, you'd need to cover it with either credit cards or a personal loan. You could end up with a higher interest rate than you originally started with.

That's why it's safer not to use your emergency fund for low-interest debt, such as a mortgage or student loans. On the other hand, if it's high-interest debt, such as credit card debt, then you should strongly consider paying it with your emergency fund.

7. Lending to someone you know

If the only way you can afford to lend money to someone is through your emergency fund, then you can't afford it. You've saved that money to protect yourself from the unexpected. What will you do if you have an emergency expense while you're waiting to be repaid? What if that person never repays you?

Loaning money to family or friends is already a dicey situation. Lending money from your emergency fund could make it much worse.

Emergencies only

Building a strong emergency fund is an impressive accomplishment that takes a lot of discipline on your part. Don't let all that hard work go to waste. Save for future expenses, and if you are thinking of tapping into your emergency fund, make sure it's for a true emergency that you need to pay immediately.

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