Ask the Readers: When Is It Okay to Use Your Emergency Fund?
Published on - January 6th, 2012 (Modified on - January 12th, 2012) (by J.D. Roth) It is a truth universally acknowledged, that a person in want of a good fortune must be in possession of an emergency fund. Hilarious literary allusions aside, the emergency fund — or rainy-day savings, or whatever you want to call it — is one of the bedrocks of basic personal finance. A solid savings account is like self-insurance; it can offer some protection when life seems intent on drowning you with one financial crisis after another.
But what is an emergency? That’s what Natasha wants to know. She writes:
As far as my emergency fund is concerned, what is actually considered an emergency? I just got an unexpected dental bill in the mail and I was wondering if I should just dip into my emergency fund to pay it instead of doing a monthly payment plan. I really don’t want that bill lingering around for months. I’d rather just pay it and get it over with since I have the money. What do you think?
This is an interesting question, and one I’ve thought about a lot lately. Since I started managing my mother’s money in July, I’ve had to make several similar decisions: For instance, should I maintain her savings account or pay off her car loan? (I chose to pay off the car loan, but that’s because I know we three sons are there to offer financial help if a big emergency arises.)
How do you decide what is and what is not an emergency?
Sometimes the answers are easy, of course. A vacation to Florida is not an emergency and should not be funded from your emergency fund. New boots are not an emergency, and neither is a new videogame console. On the other hand, if your only car is totaled, buying new transportation is an emergency. Or if your son breaks his leg, his medical expenses are an emergency.
But what about all the stuff in between? What if your computer dies? Is that an emergency? Or should you just go to the internet cafe? What if the garage roof starts to leak? Or, as in Natasha’s case, what if you have an unexpected dental bill?
Ultimately, I think the key is to decide for yourself what you emergency fund can be used for and what it can’t. But once you make that decision, stick to it. If I were in Natasha’s place, I’d absolutely use my emergency fund to pay off the dental bill. Why? Because:
- It sounds as if not paying the dental bill is going to nag at her. To me, this is a sign that she ought to prioritize the bill. I’m a firm believer that when making financial choices, you should first defeat the debts that bug you most.
- She has the money available to make the payment. If she had to borrow money to pay the dental bill, my advice might be different. But she has the cash saved, so why not use it?
- Last of all, to me an “unexpected dental bill” is an emergency.
So, if this were my decision, I’d pay the bill.
What would you do? Do you think it’s okay for Natasha to tap her emergency fund to make this payment? If not, why not? More to the point, what does constitute an emergency? What things do you use your emergency fund for? Is a credit card an emergency fund? What things do you refuse to pay out of your rainy-day savings? How do you keep yourself disciplined enough to know when something is actually an emergency?
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Ask the Readers, Choices, Savings
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Discover is a paid advertiser of this site. Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
SEARCH FOR RECENT ARTICLES
I have an amount representing 6+ months of basic living expenses set aside as a true emergency fund, which I would not break into for a dental bill if there were a payment plan available. I consider that fund to be primarily for the case of job loss. However, I also have what I refer to as a “s**t happens” fund of $2k, which I would use for something like that. In other words, if you can, have a “soft emergency” fund in addition to your true emergency fund.
loading....
I would choose not to use emergency fund money for this, but personally I would choose to pay it off straight away. My answer is similar to John’s, as it would come out of my “irregular expenses” pot, which is for infrequent but somewhat predictable expenditure. For me, a certain amount of dental work isn’t completely unexpected, since I know I’ve had to spend on it before! However, if I didn’t get free medical care and something unexpectedly came up health-wise, I would treat that as an emergency. I suppose it depends what your relationship history is with the problem at hand!
loading....
I was going to say the same thing
Most of my emergency fund is in a Tax Free Savings Account, so that’s a deterrent to touch it. (The rules say you can withdraw money any time but you can’t but it back until the following year.) It’s earmarked for a job loss or health emergency.
However, I also have a savings account to cover unexpected issues that I can’t work into my budget. (Like an unexpected repair bill) I needed to dip into it this past year, and it really took the stress out of the situation knowing I didn’t need to go into debt or touch my “dire emergency fund.” I started doing this after reading about Gail Vaz Oxlade’s concept of a “Ways and means fund”. It’s a good way of thinking about it.
loading....
Sort of like Elizabeth, my emergency fund is in a large bond. I would need to really have a strong incentive to cash in that bond. Like many posters, I also have a contingency fund which is much smaller and for things like unexpected auto repair bills or things like this dentist bill.
loading....
I also have a fund like this! I call it my ‘curveball fund’ and it is just a four digit buffer in my checking account.
loading....
This. My husband and I have the exact same thing. We have one emergency fund that is approximately eight months of living expenses. This fund is to be touched only in the case of my husband (the sole wage earner) losing his job.
However, we also have an account with $5k in it that we refer to as the opportunity fund. If an unexpected bill comes in, we pay from this account. It gives us flexibility without sacrificing preparedness for a true emergency.
loading....
Is there an echo in here?
Yeah, what they said. With one caveat…
If the payment plan were interest-free, I’d be fine to make payments. If my slush fund would earn more money sitting staying in the bank, than it would cost me to make payments, then I wouldnt touch it.
Otherwise, yes this would come out of my ever-growing, probably too elabortate, slush fund system, which looks something like this..
http://dogsordollars.com/2011/09/22/the-emergency-funds/
loading....
I like your idea of getting interest, but I also would still pay off the bill right away. I see it this way: how much interest will you really gain on the money over the course of the payments? With an interest rate of a percent or two, you’re not going to make too much money. I find it a better use of my time to pay that bill off right away and never have to think about it again. Even if I could drag out the payment and earn a few bucks in interest, is that worth time every month to write a check for another installment?
loading....
Agreed, to a certain degree…
Not worth the trouble, but its really not much trouble to schedule 3 or 4 monthly payments in my billpay, since I have to set them up to pay them anyway. And yes, just a couple dollars…
A couple dollars here in there, is pretty much the basis of all things, in my opinion.
It would all depend who I was paying, how much of a pita it would be, the difference in interest rates. All decisions I could make and execute quickly. Totally worth the couple bucks in my opinion.
loading....
I agree with the “soft-emergency” fund. I keep my EF with an online bank and then keep $1,000 at my local bank in case I need cash right away or have an unexpected bill arise, such as a dental bill. It’s like an interest-free loan to yourself.
loading....
To me an emergency is anything you couldn’t plan for (either due to it being impredictable, or not having had the time yet) but needs to be taken care of.
This would include the dental bill as it is normally something that happens unexpectedly rather than planned and it needs to be taken care of. Whether or not to use the payment plan than depends on how much money you have in your emergency fund. Are you just starting building this up you might be better of with the payment plan. Otherwise, take some out of the emergency fund.
Also, because if you can’t afford to rebuild your EF before for example job loss happens, the payment plan would be paid out of the EF as well, including interest.
loading....
The big question for me would be what percentage of my emergency fund is the bill going to be. If it’s going to devastate the fund…then no. As someone said above, you need the “What if I lose my job??” funds intact. However, if it’s only a small bit (less than 25%), then absolutely. Dental bills are an emergency, just not a catastrophic one.
loading....
There’s not enough information given for me to decide what I’d do. If the dental bill was a large portion of my EF, I’d probably do the payment plan, because I’d worry that another emergency would come along before I could replenish the account. Would I have to pay interest or fees if I took the payment plan? If it wouldn’t cost me much I’d leave my EF alone.
loading....
If the monthly payment plan is more expensive than paying a lump sum, then I would pay the lump sum (and not just a small nominal fee). Back when we had much less money, the EF’s primary purpose was to avoid extra fees so we wouldn’t get into a downward debt spiral.
And rice and beans until the EF was replenished.
loading....
I think I’d recommend that Natasha pay the dental bill, and then set up her own “payment plan” to replace the amount of money that came out of the emergency fund — on top of what she’d ordinarily save. That way the bill is paid, so it’s not weighing on her mind, but the dent in her emergency fund is only temporary (preparing her for the next emergency!).
loading....
Everyone has a different definition of the term “emergency”. What it mean s to me may not mean what it means to JD or to Natasha. Personally, an emergency fund is set up to handle expenses that were not planned or for things that may not have even been considered when developing a budget. If this bill was not expected, then it would squarely fit into my definition of an “emergency”.
One thing that has not been mentioned is the tendency for medical service offices to send unpaid bills to collections very quickly, sometimes before the due date has even come on the first issuance of a bill. That not only puts pressure on the person to pay the bill in its entirety, but it also puts a black mark on their credit report, fair or not, which is never a good thing.
loading....
It really drives me crazy that they do this. However, I don’t think they can do anything like reporting to a credit agency unless you’ve actually not met a payment. I went to the ER a few years ago and they pulled this crap and I point blank asked if I was being reported to a credit agency. They said no, they don’t do that unless you don’t pay. And I checked to make sure that hadn’t happened.
But, I agree. If I have the money to avoid that kind of thing (I didn’t b/c I was in grad school, but I do now), I just pay it off and replenish.
loading....
The way I’ve heard this explained is that medical providers are not “installment” billers. A monthly payment plan is simply not their business model. You got the service, here’s the bill, pay it by this date.
I’ve heard that in dire circumstances, they’ll work with truly impoverished patients to work out a payment plan, but that’s entirely at the discretion of the hospital/clinic/whatever, and is definitely not standard operating procedure.
The problem is when people think of a medical bill like a credit card bill, or buying furniture, and just assume that monthly payments are an option. They’re not. They’re a bill that you owe, in full, by such-and-such a date. Monthly payment plans are an exception to the rule (when it comes to medical bills).
loading....
That really depends on the provider, and dentists are often more willing to negotiate a payment plan than doctors or hospitals.
It’s something that they either offer straight up (which is what I assume Natasha’s looking at) or that you need to talk to them about ahead of time.
Unfortunately a lot of health care providers have been pushing third-party payment options (like special credit cards) rather than deal with billing monthly-pay patients on their own, and that’s almost always a bad option for the patient.
loading....
I think #3 and #4 make a very good argument that can potentially go both ways. **Can Natasha get financing at below the EF interest rate?** (Taking tax effects into account.) Also, if one goes that route, is it possible to pay off the debt early without penalty? If the answers to both of those questions are “yes”, then (personal feelings notwithstanding) it tips the scale heavily in favor of financing rather than paying a lump sum.
I bought new glasses recently. It was not an emergency, because I knew a while back that I would need new ones. One good and one decent (extra) pair of prescription glasses, everything included, came out at about $1K. I have that money and more in my savings account, and a significant fraction of it allocated to either “new glasses” or the “random use” subcategory. When I was offered a zero-cost financing plan with no penalty for early payment, though, I decided to go that route instead of paying a lump sum, particularly since I also had other large expenses coming up. I’m not concerned about the debt in and of itself; I have a good-paying, quite secure job, and I know that I have the money to pay it all off should things take a turn for the worse. So at the most, I would be no worse off making monthly payments for a while and then paying off the remainder at some future time, than footing the whole bill at once. The trick, of course, is to not let the “extra” money influence one’s savings plan.
And I agree; an unexpected dental bill would count as an emergency for my purposes as well. The only question is whether it’s a better choice to get financing and pay it off in small chunks (potentially reducing the EF contributions by that same amount for the duration), or to take the money out of savings and pay the lump sum then start rebuilding the EF. And the answer to that would depend on factors not included in the question, so in effect, it’s impossible to give a good answer even if one leaves out purely personal considerations like one’s attitude toward debt in the first place.
loading....
I did the same thing when our washing machine died. I knew it was on its last legs and had the cash saved for a replacement. The store was offering 18 months free financing if I opened a store credit card, so that’s the route I took.
In full disclosure, I also decided to buy a refrigerator because ours was 30 years old and I got a good price on one that was perfect for me. I had the cash to pay for that as I knew a 30 year old refrigerator wasn’t going to last forever.
I put the cash back in the emergency fund and have been paying $100 each month rather than the $32 minimum payment. It seemed silly to fork out that that much of the emergency fund when I could easily do the smaller monthly payments. Both will be paid off long before the 18 months are up and I will not pay a penny in interest.
Hooray for fiscal responsibility!
loading....
I would just caution everybody about using retail (store) credit no matter how financially wise as this can impact your auto insurance rates. It happened to us – our insurer switched to using credit information to set rates and we had 2 retail interest-free loans (in good standing). On renewal, our rate went up dramatically. As it happens, between them pulling our credit and being notified of the rate increase I had paid off the 2 accounts so I told them to re-underwrite me. The second rating was down significantly. (The insurance rep said she had never seen a drop that significant on re-rating.) If you research this practice (using credit information to set auto insurance rates), you will learn that having a balance on these kind of accounts can ding you for insurance.
It’s ridiculous to me — where’s the proof there is any cause and effect relationship here?!? (Note: There isn’t any — there is just CORRELATIVE data, which can be influenced by an infinite number of things, but a correlation is enough for insurance companies to use to get more money out of us.)
loading....
Just curious: What kind of glasses cost $500/pair or even close to that??
loading....
Not the OP, but my own glasses are just as expensive. I’m very shortsighted (-9.5 and -13.5 Dioptrien) and therefore need one of the highest glass qualities so that they aren’t too thick. It’s impossible to get really cheap glasses in that range :/
loading....
Ditto I’m extremely near sighted. last pair of glasses I got were $700. $200 for the frames, the rest for the lenses. Thankfully my prescription doesn’t really change.
loading....
I have progressive bifocals and a high degree of astigmatism–$435 for the lenses alone (I asked the optician to reuse an old frame that I really liked, and he did, for a very nominal charge)
loading....
Wow! I had no idea glasses could cost that much. I paid $130 for my last pair of frames, but that was because I got a designer brand (that wasn’t even worth it!)
loading....
I agree with the comments above about crunching the numbers and comparing which would be better — a payment plan for the dentist, or a payment plan for yourself.
I think the important thing is to figure out in advance what your emergency fund is meant to cover and judge its size accordingly. The more things you consider to be an emergency, the larger your emergency fund should be.
loading....
If you have a sufficient emergency fund, I’d say go ahead and pay it.
Then, as has already been mentioned, live at a reduced lifestyle until you have replenished the emergency fund.
That’s what I did when I had unexpected dental bills, too.
loading....
I agree with most of the commenters so far.
1. If the dental bill is a huge portion of the EF, go for the payment plan. Of course if the interest rate on the payment plan is high, this might not be the best idea.
2. If the bill will hang over her head and cause anxiety, use the EF but make a payment plan to herself to replenish the fund.
3. Set up a slush fund / revolving savings account for things like this in the future. I have one that I treat as a non-emergency emergency fund (ie unexpected expenses that don’t count as true emergencies so you don’t have to have anxiety about tapping into it when needed).
loading....
I would probably choose the payment plan if there wasn’t any extra cost (interest, etc.). If there are fees associated with the plan, then I would pay it out of my emergency fund, but would also make every effort to cut my expenses to make the payments to my own fund to get the emergency fund back up. It is also a very good idea to have a certain amount going into a separate account for medical expenses, because, especially as we age, health and dental conditions are more a known expense rather than an emergency. In these same lines, going forward to establish other funds for “known unknowns” as it were is a great idea. For example, car repairs are basically inevitable and should be budgeted for as with medical expenses. I think the answer as to what constitutes an emergency will depend on where a person is in their financial journey.
loading....
After this sort of thing came up a couple of times for me, I saved up another $1000 in my emergency fund, so that it has a “cushion.” It’s for unexpected things where my life would be negatively impacted, but not quite wolf at the door time. I replenish it ASAP, of course.
loading....
I ran into pretty much this exact same situation recently. A minor trip to the hospital, which turned out not to be too serious, left me with an unexpected bill. I don’t regret going, but when I received the bill, I had the option of a payment plan or using my EF to pay. I chose the payment plan for at least the beginning payments. My thinking was to see how I could adjust my budget to accomodate the payments over the course of a year.
So far it’s been about 4 months and I am thinking about using my EF to pay it off and paying into the EF from there. I just don’t like having yet another bill to pay. It feels like my monthly expenses are higher and I have no control over lowering that part.
The idea of dipping into my EF bothers me though, I’ve been able to keep it intact since I set it up. So what I might end up doing is skrimping and saving in earnest to try and pay off the bill with just regular savings and earnings in a shorter time than the payment plan. I haven’t decided yet.
In the end, I think this situation counts as an emergency if your budget can’t handle the monthly payments, but otherwise monthly payments allows you to take your time to assess your situation. New emergencies without payment plans can always come up too.
loading....
I would pay the bill. Unexpected things are generally an emergency. There are a few exceptions though.
Car repairs are not unexpected. They should be part of your overall budget. Average your car repair costs over the last year or two and budget every month. Leave that money in the bank until it’s needed. Sometimes you end up with a chunk of time that has more repairs than others and that may be an emergency, but it shouldn’t be an emergency every time you go to the shop.
If you’re digging into your emergency fund it should be for a minimum to get by. If your fridge breaks you obviously need a new fridge. I would think twice about using the emergency fund to get a top of the line machine. Same with a computer. Get something to get you by. Same idea as the car, at some point you need to start budgeting to replace things in the house.
loading....
I think an emergency comes down to whether or not you have a choice to spend the money. Was this a discretionary dental bill? If not, and you don’t have money in the regular budget to cover it, it is an emergency. However, I find “emergencies” of this intermediate nature happen regularly– you don’t have a dental bill every month, but you might have a vet bill, or a car repair, or new glasses, or any number of other things which can sock you for a few hundred bucks– in my experience, this kind of “unexpected” expense actually hits about every two months. So it is helpful to find a way to work it into the regular budget, right up front.
loading....
I agree that these things tend to pop up every month or three. For us, it was new tires last winter, washer in the spring, dishwasher repair in the fall, and now an unexpected medical bill.
We save X amount each month, so I usually just subtract the cost of the ‘mini-emergency’ from the amount that I had budgeted to send to ING; saves the time and hassle of sending it back and forth from checking to savings and then back to checking again.
Of course this works best if you’ve budgeted to regularly save at least $400 to a ‘slush fund’ (short-term) savings account each month.
loading....
I share Natasha’s inclination for avoiding debt and an unexpected medical expense to me counts as an emergency, so for me I would pay it out of the e-fund unless the payment plan option was excellent (e.g. no fees and 0%).
The other thing I always do is whenever something comes up that makes me consider tapping the e-fund, I reevaluate whether it is a true emergency or something I should have been saving for. A couple examples: I was used the e-fund for an auto repair, which made me realized it is expected that cars with wear out or break down over time, now I have dedicated savings for car maintenance (as an added bonus, if I never use it, it makes a nice addition to a replacement car fund). I used an e-fund for a medical bill, now I have an HSA to save for medical expenses, it covers all the planned expenses such as glasses and checkups and soon it will be large enough to cover my entire yearly deductible should anything devastating happen.
loading....
My question would be twofold. What are the charges/fees associated with the payment plan and how long will it take to replenish the fund?
If there are fees or interest associated with the payment plan I’d be more likely to use the emergency fund to pay part or all of the amount to avoid the extra loss of money.
If there are no fees or the fees were minimal then though the bill might “nag” at me, I’d do the payment plan. I’d also do the plan if it would take more than a year to replenish the emergency fund.
I agree that we each have to decide what is and isn’t an emergency for us. In my situation I’m comfortable having an amount I’m not tapping short of medical emergency or job loss, and above that amount I’m softer with what is and isn’t an emergency and generally use that for unexpected bills. Over time I’ve been raising the “hardline” amount as the general account grows.
loading....
We had a large hospital bill earlier this year (~$5000). They wanted to put us on a payment plan, which we would have done, but we asked them if we could get a discount if we paid it all right away. This is what I think is one of the biggest reasons to have a large emergency fund. They gave us 10% off for paying it up front. So, since we had that money in an emergency fund, we were able to save $500. Having an emergency fund allows you to save money, which in turns, adds to your emergency fund.
loading....
This is a great point. If there are no fees, no interest if there is a payment plan, can you instead save money paying cash? It never hurts to ask.
loading....
I am still in the process of paying off debts, so it’s harder for me to cash-flow larger, unexpected expenses. The way I look at it, if I have the cash to pay for something, rather than add to our existing debt, I will pay cash. The flip side of course is that the next few months my debt payments might be smaller as I’m taking the time to replenish the emergency fund.
However, I have to point out that some of these types of things should be planned ahead for outside of an emergency fund. If you bite into something hard and crack a tooth, that’s a qualified unexpected dental bill. But if you practice poor dental hygiene and put off going to the dentist until you have an abcess, that’s not really an unexpected expense. The previous commenter mentioned knowing for a while that new glasses would be necessary. That’s not unexpected, one could put aside a small portion of the upcoming expense each month until all or most of the money is collected. We participate in a Health Flexible Spending Account through my employer, so most medical expenses don’t affect our monthly budget.
JD has spoken about dedicated savings accounts before, mainly in reference to his car and travel, but I think this applies in a smaller scale, too. We have a sinking fund for car repairs, house repairs, etc. and the amount we allocate is based on things we know, like the age of the car and the likelyhood that it’ll need a larger repair in the future. This means that most expenses in those categories aren’t going to be emergencies we have to dip into the EF for.
loading....
I would definitely pay the bill. I think some things come down to your budgeting preference. I work a zero budget, so every dollar has a place and I put money into my emergency fund just for things like this unexpected bill. However, some people leave a little wiggle room in their budget and could spare to pay for this expense out of their discretionary funds from the month.
loading....
Why make it so complicated, just pay it off, and save the money from the payment that you would make to the dental bill. problem solve
loading....
If the alternative is a payment plan that she might owe interest on, I’d say use the emergency plan for the dental bill, and outline a plan to pay back the emergency fund as soon as possible.
loading....
I like other readers here have a ‘Don’t Freak Out Cause I Got This’ pot and a ‘penalty pot’ for REAL emergencies. The Don’t Freak money is about 1/3 and accessible in Money Market, and the rest of the money is 2/3 and stored in CDs. The CD interest is good, which motivates me to keep the money there, but in the case of a True Emergency (like job loss) I know I can access it easily by paying a small penaly. If you’re going this route, investigate the bank’s policy re: breaking the CD early. A good standard is a penalty of 2 months interest. More than that and it may not be worthwhile. This also means I keep 5-year CDs without worry, because I know if rates go up, I can just break it and move it somewhere better.
loading....
I have a 5k emergency fund to spot any unexpected expenses I incur while paying down my debt (school loans). I made a list of criteria that must be met before I alow myself to dip into the emergency fund… 1. The cost must be a need and not just a want 2. The cost must be something I could not have planned for 3. The cost must be over $100. I am still left to make the call of what is a need and what is a want but these criteria weed out a lot of expenses before it gets to that point.
loading....
I would pay off the dental bill right away. But I would also figure out what the alternative – a payment plan – would look like, and then I’d set up an automatic monthly payment from my chequing account in that amount back to my emergency fund.
I’ve got an ~$3K emergency fund, and I’ve tapped it once – to pay for a plane ticket home when I missed my flight from Germany and was stuck in Frankfurt. Basically, it’s the “Oh SHIT” fund. Any financial situation that would prompt me to say that phrase is one that’s worthy of emergency fund use.
loading....
Seems like most personal finance folks (for example Dave Ramsey) recommend funding the “emergency fund” even BEFORE paying off debts (assuming that the fund is considered $1K-$2K, rather than 3-6 months of expenses). So, it seems that the idea is that paying debt service or financing charges is preferable to pulling money out of the emergency fund.
In this sense, the emergency fund is primarily seen as money for absolutely necessary expenses that need to be paid immediately in cash. Those kinds of expenses are rare, which is typically why the fund can be so low.
So, my thought would be to not dip into the emergency savings, but just take the financing options and try to pay it off faster by restricting some other expenses in the short term.
But, ultimately, do what works for you – figure out what role your emergency fund plays for you, and then use it according to that role.
I don’t even have a dedicated emergency fund, because I’m fortunate enough that my checking account balance generally floats at 2-3x what that fund would be, so it’s very rare that I wouldn’t have a couple thousand dollars available and, if I did, I have sufficient other sources of cash (not my own, necessarily) available to me that it’s just not a real concern, even in the odd event that my checking account got low and then I had an emergency at the same time.
loading....
I take the emergency fund idea a step further. There are a few types of emergencies that will come up at some point in life so I have “targeted” emergency funds for them examples:
- Job Loss Fund (6+ months of bills on hand)
- Medical/Dental Fund (for “unexpected” bills)
- Auto Repair (for big repair jobs)
Quantifying these can be difficult. In my case I keep $1000 in the medical/dental and auto funds. Yes it could cost more than that but at least it is some sort of buffer. If you have an old car or go to doctors often you can be your own judge on the proper amount to maintain.
As for her case pay the bill now. Take the amount that the payment plan would have been and put that back into her emergency fund each month until it is back to “full” again.
Then I would do as I state for above and have money earmarked for these things in the future. It helps you by having some self insurance for little things like this in the future!
loading....
This is what I do. I have several sub-accounts in ING, including a “health care savings” account. I hate to tap into it because I’m trying to save enough for dental surgery (impacted wisdom teeth), but it’s comforting to know that the funds are there if I should need to see the doctor for one reason or another. (I’m uninsured, so this is as close to peace of mind as I can get.)
loading....
The real question is how the OP is going to replenish the emergency fund. Whether she takes from it now or goes on a payment plan is somewhat of a shell game. If she goes on a payment plan and loses her job, she’s still going to have to raid the EF to pay the bill, or risk going to collections.
The real point of the EF is to avoid fees/interest payments on payment plans, so she should do whatever costs less.
loading....
The problem is the name itself. You call it a emergency fund because it helps people learn how to save. I view my finances differently. I save everything I make, and make smart decisions on what to buy based on what I can afford and how often. So yes pay the dental bill. But dont buy snow boards, or big trips when you cant afford them. Its really quite simple spend less than you make. I know this is not possible for everyone out these as some people barely make minimum wage but if you have good paying income, then just make sure you are constantly saving.
loading....
Yes, it takes a while to get to this point (and may be difficult to achieve with a small or variable income) but I never touch my savings accounts because my spending is so much lower than my income that I can cover most unexpected costs on a monthly basis. And when those costs don’t come up, I just save/invest more.
loading....
I was thinking about this the other day — and the $1300 in my savings isn’t really an emergency fund — for me, it’s more of an “irregular expenses” fund, and it’s one that I can use to pay first/last/deposit on an apartment without feeling guilty.
loading....
Emergency funds to me are replaced by insurance; I trade an unkown expense for a regular and predictable one. An emergency fund is a “self insurance” policy for anything you don’t have coverage for.
In this case, the woman does not have dental insurance. I have it through work (and a few friends who are dentists, part of my social safety net) so I would only have the deductible.
Similarly, if you have auto insurance, property insurance, health insurance, employment insurance, disability insurance; your emergency fund especially for single people with solid jobs does not need to be so epic and you can invest that “6 months living expenses” or actually spend it on making yourself happy (my meaning of life).
In this case, since the person does not have dental insurance, her emergency fund is her self insurance and therefore she should use the emergency fund to pay for the emergency dental work. In the future she should both look into dental insurance plans and pay her emergency fund back.
loading....
Most dental insurance plans in the U.S. aren’t worth the paper the policy is printed on.
loading....
Dental insurance may be a good deal if you are psychic and can predict exactly what kind of dental care you will need in the coming year. After I chipped a tooth and needed a crown, I broke down and purchased dental insurance. A few years later when I broke a tooth, I thought good, I’m covered. However I needed an implant. The only thing the insurance would cover was some of the cost of pulling the tooth (around $100); the rest of the remaining 5K bill they did not cover.
loading....
Actually, she doesn’t say she doesn’t have insurance, as I read it. She says she has an unexpected bill.
Now, let’s assume a broken tooth or a filling falling out that results in a crown.
Okay, if it’s my first of the year, I’ll pay about $400 for that. That’s not tiny money to me.
Oh, and the second one? I’m over my coverage limits, and I’ll have to pay another $1300.
So please, don’t make the assumption that insurance cures all ills. It doesn’t. Most insurance is really only good for catastrophic issues, and not really then.
loading....
It’s about selecting the right kind of insurance. If you’re a person who reguarly breaks teeth, you need insurance that reflects this or to build it into your regular expenses.
It’s a shame some people have such bias against insurance. It clearly needs better PR (in every country).
loading....
Does the payment plan on the dental bill have an interest rate above 0? If it does, then pay it off, especially with the savings rates so low. If it no-interest, then I would go with the payment plan and keep your cash until the very last moment. You never know when you might need the cash for something.
I guess it would also depend on the amount in savings and the amount of the bill. If the bill is a rather small percentage of savings, then just pay it. If it will clean out your e-fund, then go with the payment plan.
loading....
That is an excellent literary allusion. Miss Austen would be proud! I’d say – if you can afford it without dipping into the fund too badly, then yes, pay the bill. But – if this will leave you vulnerable, then, no, do the payment plan.
loading....
I have an account with $3,000 for emergencies that sits in my bank’s savings account and which is linked to my checking account in case of the unthinkable, overdraft. Into that account, I transfer $250 a month from my checking. The $250 a month is our vacation money ($250 x 12 =$3,000). We take a vacation every November and if no real emergency strikes, we go on vacation. If one does strike, we have up to $6,000 in our savings to cover the emergency. This has worked for us the past 3 years, and luckily, we haven’t had to skip a vacation. But, emergency to us means something that requires immediate attention and payment or you are subject to interest or additional fees. If I could finance the “emergency” without incurring interest or incurring additional fees, I would. I have loans and a mortgage, which charge me interest so if I have extra money it goes to paying down that debt, not debt that is interest free. Plus, you never know if a real emergency will strike after you just liquidated your fund for something that could have been financed.
So if it was up to me, I would finance the dental payment and keep the emergency money in case of a real emergency.
I hope this helps.
loading....
Perhaps the term “Emergency Fund” should be retired. How about “Unexpected Fund”? “What If Fund”?
New boots could be an emergency, if you’re a construction worker (or hooker). A leaking garage roof is definitely an emergency, as not repairing it could turn into a tsunami.
I believe such a fund should exist for whatever comes your way that’s out of the ordinary and not in your budget. It COULD even be for an expenditure for something you want and may never have the opportunity to purchase again at a certain price or is being discontinued.
BUT, my caveat is – You must also decide that you will make every effort to replenish that money as soon as possible, and maybe a little bit more!
loading....
Ha. I like the “construction worker or hooker” part
loading....
I’ve been in a similar situation, emergency medical bills, and even though stretching out the bill tends to bug me, I’ve done it with them because I’d rather do that than dip into savings.
Medical establishments are usually fine if you call them up and say “I’d like to pay this amount per month until I’m finished.” I have never had to pay interest on stretching out a medical bill. I take the psychological hit but I know my savings is still secure.
For me, my emergency fund is for when I’m absolutely strapped and can’t make my normal discretionary money work. But it sounds like you really want to pay it. I guess if it won’t take out a huge chunk of what you’ve built up, and if you figure out some way to pay yourself back soon, then it’s no big deal.
loading....
Sometimes it takes a little discomfort to make important changes in life. Leave the emergency fund alone. Take the payment plan. Work harder and spend less and get the bill payed off. Otherwise, the emergency plan becomes an easy fall-back plan, when the real issue is setting up income and budgeting to account for these “normal but unexpected bumps in the road.”
loading....
Natasha’s circumstance is not an appropriate use for an emergency fund, in my view.
Natasha should have a budget, and her budget should include line items for periodic expenses like car repairs, appliance replacements, and uninsured medical needs–all the stuff that we know is going to happen but we don’t know when or exactly how much. So if Natasha budgets $600 per year for car repairs, she should set aside $50 per month in a ‘periodic expense savings account.’ This is separate and different from her emergency fund. Then when Natasha’s car needs a repair (or, in this case, she has an unexpected dental bill), she takes money out of her periodic expense savings fund (instead of putting it on the credit card or depleting her emergency fund).
The larger point is that we all know that “unexpected” expenses happen every year, if not every month. So expect them! Set aside cash, preferably in a separate savings account, every month designated specifically for these sorts of expenses.
An emergency fund should be to keep your head above water–mortgage paid, utilities paid, food on the table–in the event of a layoff or other temporary cash crisis.
Thanks
loading....
This works well in theory, except when you have the transmission go out 3 days after getting 4 new tires. The $1000 in our car repair fund wasn’t enough to cover this bill in addition to the tires, so we borrowed from our emergency fund to pay the balance, then paid it back.
Trust me, the transmission going out on your sole vehicle is an emergency.
loading....
If you have several smallish dedicated savings funds (or sub-accounts, as J.D. refers to), then you can pool them together to cover the auto repair/tires bill and then go about the job of building them all back up. For instance, you can use your vacation account, your auto maint. account, and your new appliances account to pay off the ‘emergency’ and then build them back up.
Yes, you are short for a while. Still prevents you from having to touch the REAL emergency fund.
loading....
“Unexpected” dental bill is an emergency.
Additionally, I will tap my emergency fund for planned expenses as well, for example: auto insurance premium;
BUT I would make sure I have at least $3k left in emergency fund AND there is an reward for paying in full.
Back to my example, I believe I get $50 off to pay $900 auto insurance premium. I earn 5.6% in interest + transaction fees(for payment plans).
loading....
The emergency fund that my partner and I maintain might as well be named the “medical and automotive fund.”
We’ve just moved money from it to our regular checking for the first time, because our cat has to have dental surgery. I cannot and will not put off having it done until I can save “up front,” so I will use the fund.
In fact, I think that’s more or less what it’s for. If a family member’s (that’s me, my partner, and two cats) life, health, or shelter would be adversely affected by waiting, it gets to come from that.
Also, my partner is a cancer survivor. If she ever has another incident, we’ll be using the emergency fund for her treatment again.
Because I just won’t make someone suffer any longer than necessary.
loading....
How exactly is a dental bill “unexpected”? Was there secret work being done while she was sleeping?
My first action in this case would be to call the dentist to see if they would discount it for full payment. We recently knocked 30% off an ER bill by doing just that. It would make the decision much easier.
Otherwise, I’d tap my emergency fund only for food, shelter or medical emergency or if my income would be affected (like if my laptop died since I use it for work).
loading....
A dental bill can be unexpected if you were told that your insurance covers $xxx amount of it, and your copay is only $20…so you pay that, and it turns out later that the receptionist was wrong about it, or made an error, and you actually owed more…so they simply billed you when they discovered the error.
I’ve had that happen to me, and no, it isn’t something you can argue and win over.
loading....
I don’t know for the others, but to me repairing the computer or getting a new one is a need and an emergency. My computer is my main working tool.
Getting a new shiny macbook pro to replace the old white macbook I’m using now is not an emergency. A cheaper laptop will make it.
The bill of course is an emergency, other thing is that she should replenish her EF ASAP.
loading....
I was about to post the something similar.
Then I realized that since I need a reasonably powerful, reasonably up-to-date computer for work, I have 5 older ones sitting here at home that would tide me over for a few months if I needed them to.
I would still need to get something more modern pretty soon, but they would give me time to save the money to pay up front.
(I’ve got A file server, a computer for the kids, my wife’s laptop, a cheapie netbook for fun, and an old iMac hooked up to a VHS player for ripping home videos).
loading....
I built up my emergency fund to 6 months expenses, but now I continually add a token amount to it (40/month for me) – it works like the soft EF explained above. If it’s a small unexpected bill I just pay it and forget it, if it’s a larger bill that depletes my emergency fund below the 6 month expenses level, then I pay it and until it’s paid back I divert all other short term savings to the EF (my new car fund, my vacation fund and my reno fund). It just means the dates on those move further out.
loading....
Lots of good comments here. I think if the emergency fund is well-funded, use it to pay the expense. Then, follow the payment plan that you would have used to pay the dentist to pay yourself back….
loading....
I’m a big fan of Mary Hunt,and she advocates having a “freedom fund” as well as an emergency fund. The freedom fund is where you put aside money for expenses that happen irregularly but always happen. Like car repairs, health/dental expenses, Christmas, clothes. She says to add up how much you paid on those things last year, divide the number by 12, and set aside that much every month for that purpose.
Are medical and dental bills really unexpected or are they just not consistent? Obviously we have health care expenses, so they aren’t completely unexpected. Same with car repairs, car taxes, appliance repair/purchases, etc.
Mary *does* say that if you have to dig into your emergency fund, paying that money back should be your first priority. In this case, since she wasn’t prepared for the unexpected bill, I would say to take the money out of the emergency fund and focus on putting it back in as quickly as possible.
loading....
I was just going to post the same thing. When this question is asked (what can I spend the EF $ on?), it sounds to me as if people think they’ve saved it up, and then they use it, and then it’s gone.
So part of my consideration for the borderline cases would be how long it will take me to rebuild my EF back up to its current level & whether the immediate expense is worth having the EF underfunded for that amount of time.
I agree that in the original situation posed in the post, she could go ahead and use the EF and then commit at least the amount she would otherwise have been paying out monthly to rebuild the fund.
loading....
I like this idea SO much better than having multiple micro accounts (medical, car, what have you) that others suggest. Much easier to implement.
loading....
I think it might depend on where you are with your emergency fund and finances. When I first got started down this path, I had saved $2000.00 for a fund, and was working a low income job. I occasionally dipped in to it to cover bills from month to month when I had brought in less income.
Over time though and after getting married this practice has stopped. My emergency fund now covers 9 months of living expenses, but out primary view of it is that it covers 6 months living expenses, and day to day vehicle/small medical expenses.
loading....
I would use the emergency fund and then repay the monthly amounts until my emergency fund was rebuilt. Plus then if you can live without the monthly amount, you can continue to save for other expenses down the road.
loading....
First-why is the dental bill “unexpected”? Did the Dentist’s office properly bill the insurance company? Did the insurance company pay according to her benefits, or did they deny it simply because they hoped she would give up and pay the bill?
I had an unexpected dental bill. The insurance company refused to pay for my general anesthesia for my impacted wisdom tooth because it was not “medically necessary”. I had to have my Doctor’s office send a letter of why it “medically necessary”. I wrote my own letter with copies of their plan book highlighting the section which states they cover general anesthesia for impacted wisdom teeth.
Do not pay the bill until you are confident the bill is correct. Once you know for sure – use your emergency fund to cover it.
loading....
I agree that the dental bill was likely not “unexpected”. I guess maybe she expected the insurance to cover more? Anyway in situations like this I try to minimize how much I pull from the emergency fund. Rather than just saying it is an emergency and pulling the entire amount from the EF, I would scrimp and save and scrape together as much cash as I could to pay the bill and then when it comes time to pay it – pull the difference between what you have saved and what is due from the EF to pay the bill.
loading....