Back to All Posts

When is a Good Time to Use Your Emergency Savings?

May 4th, 2020 • Damian Dunn

Look, there are only so many cliche ways to start a blog posts in these times so we’ll jump right in. Your emergency fund, if you have one, is likely getting quite the workout right now. You may have been laid off, furloughed, or dealing with the financial side effects of lower hours, lower commission, or lower sales. Whatever your situation, these times are impacting everyone in some way. Your emergency fund was designed to cushion you during tough times, but it can be hard to know how best to use it. This blog post will help you make those tough decisions.

There is an interesting area of behavioral economics research that suggests that when some people face a financial emergency, they prefer to borrow money even when they have ready funds available to meet the crisis. It’s ironic, isn’t it? You save for a rainy day and then when the cloud bursts, you don’t want to reach for the umbrella. Can you relate to this idea?

Researchers theorize that this seemingly irrational behavior stems from our sense of responsibility (or perhaps lack thereof). More specifically, if you borrow money you have entered into a hard commitment to a lender to pay it back. But if you take the money from your savings account, no one will make you return it. Mental accounting also plays a role. It is even harder to “dis-save” if you have earmarked the savings for the benefit of your child (i.e. an education fund).

Think about it. You patiently built up that pool of savings over months, maybe longer. And, well, it just looks good sitting there. You see the balance on your screen and it’s like a warm blanket wrapped around you, protecting you from the cold. How can you possibly part with it? Rationally, you know that using your credit card to get by at this time and paying 19% interest for the privilege does not make economic sense, and yet…

Research provides a possible solution. In a lab experiment, researchers found that when subjects were given the option of taking money from savings and entering into a “pay-back” agreement, they were more willing to use their savings rather than borrow money. 

So, consider mimicking the “commitment feature” of borrowing money by setting up an automatic repayment schedule to your emergency savings. For example, if you use your credit card to make a $500 purchase, your minimum payment the following month is likely to be about $25. Instead, withdraw $500 from your savings and at the same time, set up a monthly auto-transfer from your checking account to savings of $25 for 20 months. (You can increase that amount later as your situation improves.) The effect on your monthly cash flow is exactly the same, but you have saved more than $100 in interest charges. And if you were thinking of taking a cash advance on your credit card, the difference is even more stark; that cash advance will cost you more than $150 in fees and interest.

Depending on how much you have saved, you may arrive at a point where your balance is so meager that you simply cannot bear to part with the last few dollars in the account, or perhaps it is exhausted completely. That is when borrowing becomes the next option. But not before. Your emergency fund is there to protect you from credit card fees, loan sharks, and borrowing money from family… until you’ve exhausted it that is.

This is an incredibly anxious time and we all know that humans do not necessarily make the best decisions in times of stress. It is even more important right now that when we are considering a money decision, that we take a deep breath and think before we act. When faced with a range of possibilities, not all of them to your liking, it is vital to think clearly about which option will set you up best for future success, so that eventually you arrive “on the other side” as financially healthy as possible.

Having an emergency fund in times like these is a gift. Use it when you have to and hopefully as your situation improves you’ll pay yourself back for your future self.


To talk to Damian or one of our other experts about your savings questions, sign up for Hey Money today!

Sign up for email updates