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When Is It OK to Tap Your Savings?

An emergency savings account is an extremely powerful financial tool. However, once you have one, the question often arises as to when it's appropriate to use the money you've saved in that account. Given what a pain it is to build a good-sized cushion, you certainly don't want to spend it frivolously -- but some people get so protective of their savings accounts that they don't spend even when they should. An expense that qualifies as an emergency will meet the following four criteria.

Unavoidable

Some expenses are obviously unavoidable. If your kid breaks his wrist while skateboarding, he needs medical treatment -- no question. Other expenses are just as obviously not necessary; no one requires a trip to Disney World. However, many expenses fall into the gray area in between those two extremes and they can be difficult to categorize. For example, whether buying a new suit for work is unavoidable depends on the circumstances. If you already have a dozen perfectly good suits, a new one's unlikely to qualify as unavoidable. On the other hand, if you just got a new job that requires a suit and you don't own any, a new suit is in fact a necessity.

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Unexpected

Necessary expenses that you knew were coming don't qualify as emergencies. The idea is to work such expenses into your regular budget and save for them in advance if need be. For example, many people renew their car insurance policies once or twice a year. Paying for an entire year of car insurance can get awfully expensive, and it definitely qualifies as necessary, but since you know exactly when the bill is coming due, it's not unexpected. As a result, you can't qualify this expense as an emergency. If you have trouble coming up with the payment every time your car insurance bill comes around, then divide the usual insurance premium by 12 and set aside that amount each month. That will help you come up with the money without requiring a dip into emergency savings.

Urgent

If an unexpected and necessary expense arises and you can't pay for it out of your normal budget, can you hold off for a little while until you can pay for it? Some expenses absolutely can't wait, but for others you may be either able to wait to make the purchase or wait to pay for it. For example, if you wreck your car and you need to get it fixed so that you can get to work, then that repair can't wait but you might be able to arrange a payment plan with the mechanic. On the other hand, if you wreck your car but have a second car and can still get around with some inconvenience, waiting to get the car fixed until you can afford it is a definite possibility.

Unaffordable

Most budgets have at least a little give. If an unexpected expense pops up, and it's not too pricey, you may be able to pay for it out of your normal income just by making some minor adjustments. For example, if you can pay for a crisis by cutting back on frivolous expenditures for a couple of weeks, that would be preferable to tapping your emergency savings. But if an expense would put real strain on your budget and put you at risk for not being able to pay your regular, required expenses, then by all means hit up the emergency savings account instead.

Use your instincts

If an expense definitely meets some of these criteria but you're not sure about one or two others, ask yourself what the consequences would be if you didn't make the purchase or didn't pay for it out of emergency savings. If the consequences would be pretty unpleasant on both counts, then the expense qualifies as an emergency and turning to your emergency savings makes sense. Just remember that taking money out of your savings account means that you need to replace it -- not instantly, but over the next few months. That way, when the next emergency comes around, you'll be ready for it.

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