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4 signs it's time to tap into your emergency savings

Business Insider logo Business Insider 3/25/2020 Laura Grace Tarpley
© Bloomberg

If you have an emergency savings account - congratulations! You've put in the hard work and self-discipline to save for a rainy day. Now your dedication is about to pay off.

You've probably heard that you should only touch your emergency fund in the case of an unexpected emergency. Well, the spread of coronavirus has already led to thousands of unexpected layoffs, and the Economic Policy Institute predicts 3 million job losses by summer.

If you've experienced a job loss, you may be facing a financial emergency. The good news is that money in your emergency savings account is meant to be spent - as long as you use it when the time is right. Here are four signs it's time to dip into your emergency savings.

1. Your checking account balance is dwindling

If you're bringing in significantly less money (or no money at all), your checking account balance is probably decreasing. You shouldn't necessarily dip into your emergency fund as soon as you stop earning an income. But if this problem continues for a while, it could be time to turn to your savings account for help.

How low should you allow your checking account balance to go, though?

It's a tricky question. You don't want to touch your savings unless it's necessary. But you also don't want to wait until you have $5 in your checking account and risk overdrawing.

When it comes to your checking account balance, there's no magic number that signals it's time to run for the emergency fund. Everyone's preference is different. But once you have less than one month's worth of expenses in your account, think about whether it's time to withdraw from your savings.

You may want to recalculate your monthly expenses, though. That number could be lower now than it was a few weeks ago. Some companies are allowing customers to pause bill payments, and any reductions could lower your monthly costs.

2. You've contacted companies about pausing payments

One of the scariest parts of losing a job is not knowing whether you'll be able to pay your bills this month.

Thankfully, numerous companies are offering grace periods for Americans who have been financially impacted by the coronavirus. You may be able to temporarily pause payments for utilities, student loans, credit cards, and insurance. Some landlords have agreed to hold off evicting tenants who can't pay rent, and some banks are allowing homeowners to pause mortgage payments.

Be sure you've contacted as many companies as possible about halting payments. If you've called everyone and are still struggling to make ends meet, you can probably turn to your emergency fund.

3. You've cut out extraneous spending

When you're stuck at home and bored, it's easy to spend money on nonessentials. Ordering food from local restaurants and shopping online can quickly become the new normal.

Before you withdraw money from your emergency savings, think about how you can cut costs in other ways. If you've already slashed frivolous spending and need money for essentials, consider using your savings.

4. The purchase is necessary and urgent

There are plenty of expenses that aren't exactly impractical, but they aren't essential, either. They seem important, but are they worth touching your emergency savings for?

Other expenses might be necessary in the long-run, but you probably don't need to pay for them right now. You might feel less financially stressed if you hold off until you have a steady stream of income again.

It's up to you whether you want to dip into your emergency fund. Do what you think is best for your personal situation. But if you're on the fence about a purchase, you can ask yourself, "Do I need to spend this money right now?" Hopefully, your answer can help you in making a tough decision. 

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