You've Dipped Into Your Emergency Fund. Now What?
Sometimes life looks like this:
Things are moving along at a steady clip and you’re finally feeling some hope for the future. Then all of a sudden, life hands you something unexpected. Maybe you’re working the Baby Steps and managing your money like a boss when your car breaks down, your furnace gives out, or your job is no longer your job.
With an emergency fund you can take a deep breath, use that emergency fund to pay for what life throws your way, and move on with a sigh of a relief!
But what comes next? When and how should you rebuild your savings? Let’s explore this together.
But First, a Word of Encouragement
If the thought of rebuilding your emergency fund sounds a lot like going backward, remember this: you’re saving for the future. Yes, you might have to hit the pause button on your current financial progress, but you’re doing so in order to protect yourself and your family in the months and years to come.
Tap into the feeling of relief you got when you deflected an emergency with cash. Let this motivate you as you move forward. And that’s exactly what you’re doing when you take a necessary and purposeful break in the Baby Steps to build your emergency fund back up.
Rebuilding a Starter Emergency Fund
This advice goes out to our friends who are paying off debt in Baby Step 2. Go you!
Your emergency fund should become a top priority as soon as the amount falls below $1,000. If you can get there quickly (within the next month or two) just by manipulating your monthly budget, go that route.
Otherwise, you’ll want to make only minimum payments on all your debts and put any extra money you can toward replenishing your emergency fund as soon as possible. Then you can get right back to work crushing your debt!
Rebuilding a Fully Funded Emergency Fund
If you’re already saving for retirement and college, paying off the house early, and living generously, you may not feel a sense of urgency to restock your emergency fund. After all, you’re living the good life in Baby Steps 4, 5, 6 or maybe even 7!
Still, you got where you are today because you listened to sound advice. And we’ve got some more coming your way: Debt doesn’t discriminate. It’ll come looking for anyone with an empty bank account and a worthy emergency. You already know debt is the enemy. So suit up.
We recommend a fully funded emergency fund equal to three to six months of expenses. You might lean more toward three months if you are a two-income household with steady pay and no foreseeable health issues. You should probably shoot for six months of expenses if your pay is irregular or you or someone in your family has health concerns.
So what does it look like if you’re rebuilding your fully funded emergency fund?
For families who require six months of expenses:
- When your emergency fund falls below three months of expenses, stop retirement funding and all other forms of extra saving, such as house payments, college contributions and dream vacations, until you save up another three months of expenses.
- When your emergency fund falls between three and six months of expenses, evaluate how long it will take you to replenish the fund just by adjusting your monthly budget. If it will take more than five or six months, continue with the more drastic measures mentioned above.
For families who require three months of expenses:
- When your emergency fund falls below three months of expenses, evaluate how long it will take you to replenish the fund just by manipulating your monthly budget. If it will take more than one or two months, go ahead and stop retirement funding and all other forms of extra saving, such as additional house payments, college contributions and dream vacations, and put that money toward your emergency fund instead.