I Lost My Job. Do I Tap My Emergency Fund Right Away?

As of April, the U.S. unemployment rate was 3.4%. That means many people who want to be working are gainfully employed.

But you might end up losing your job for a variety of reasons, whether it's that your performance isn't up to par or your employer is forced to cut corners to conserve funds. And once you're out of work and you lose your paycheck, money might become tight. But should you plan to tap your emergency fund right away? The answer is, it depends on the situation.

You may not need your savings immediately

The whole purpose of having money in an emergency fund is to be able to cover your bills when you're hit with an unexpected expense or your income goes away. If you've lost your job, tapping your savings account to cover your bills is certainly a reasonable thing to do. But you may not need to touch your emergency fund right away.

For one thing, some people who lose their jobs through no fault of their own are entitled to severance pay from their employers. So, let's say you'll be receiving the equivalent of one month's pay. In that case, there should really be no need to touch your savings until that month is up. After all, you're not out any income that month -- you're getting your paycheck without having to go to work.

What's more, it's often the case that if you lose your job through no fault of your own, you're entitled to weekly unemployment benefits from your state. Those won't replace your entire paycheck. Rather, they'll replace a portion of it. But you might manage to get by on unemployment benefits if you're able to cut your spending substantially. If that's the case, you may be able to hold off on raiding your savings for a bit of time.

However, if you're let go for cause, unemployment generally will not be an option. And if you're not eligible for unemployment benefits or severance pay, then tapping your emergency fund may be necessary immediately so you can pay your bills without falling behind.

Make sure you can cover at least three months of expenses

Losing a job is far from ideal, but it can happen. And that's why it's so important to make sure you have enough cash in the bank to cover a minimum of three months of living expenses.

Comb through your bank and credit card statements from the past six months and see what your essential bills total. Then, multiply that by three to come up with your minimum emergency fund target.

It can take time to find a new job after losing one. This holds true even if you're great at what you do. If you maintain a solid emergency fund, you'll have money to tap when your paycheck goes away. And even if you don't end up having to take an emergency fund withdrawal right away, you might have to take one eventually -- so having that money available to you is a really important thing.