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How do you rebuild an emergency fund after you’ve used most of the money?

Select spoke to CFP Derek Ripp for advice on recouping funds in an emergency account.

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Wong Sze Fei / EyeEm

It finally happened: You had a major home repair, a car fix or other big expense take you by surprise. But because of good planning, you were able to cover the cost immediately thanks to your emergency fund.

It can come as a relief to know that your emergency fund did its job. But at the same time, it can sometimes leave you feeling guilty for dipping into the account and even overwhelmed by the thought of having to build it back up again.

"A savings account is designed to be spent," said Derek Ripp, a Certified Financial Planner and Partner at Austin Wealth Management. "If clients use the money in their emergency fund for a surprise expense, that's okay because that's what it's there for. Life happens and we can't predict the impact. Try not to feel guilty about that."

While using your emergency fund can be bittersweet, it's important to start rebuilding the account as soon as you can. Below, Select breaks down a few things to keep in mind when doing so.

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Prioritize your emergency fund

It can be easy to feel that your expenses are often competing with your financial goals. Maybe an emergency expense came along right when you were ramping up your efforts to start investing more or when you were finally starting to grow your savings to buy a home. So, can you (and should you) rebuild your emergency fund and go after other large financial goals at the same time?

If you've used most of your emergency fund it's important to prioritize building it back up so that it's fully funded again. This may mean hitting pause on some other financial actions you've been taking, but remember that a substantial emergency fund can help you avoid going deeper into debt to cover the next surprise cost. Otherwise, you may be forced to sell an investment to afford the expense, or take on a loan or other debt that you can't afford to shoulder at the moment.

"Unfortunately, if you don't have the emergency reserve but more unexpected expenses come up, you're digging yourself deeper into the hole, which means spending more [on] credit cards and even withdrawing from your retirement funds." Ripp explained.

To figure out what a fully funded emergency account looks like for you, you'll want to total up all your necessary monthly expenses — including rent, food, bills, loan repayments and insurance (exclude leisurely expenses) — and multiply that total by the number of months you want your fund to cover. So if you spend $2,000 per month on all your necessary expenses and want a six-month emergency fund, you'll need to have $12,000 in the account in order to consider it fully funded.

If you don't keep your emergency fund in a high-yield savings account you may want to consider moving it to one. High-yield savings accounts, like the ones from Marcus by Goldman Sachs and Ally Bank, allow you to earn a little more interest on your balance every month compared to what you would get by keeping your money in a traditional savings account. This way, your money can grow (albeit slowly) and still be easily accessible when you need it.

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a Member FDIC.
  • Annual Percentage Yield (APY)

    1.90%

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    No

  • Offer ATM card?

    No

Terms apply.

Ally Bank Online Savings Account

Ally Bank is a Member FDIC.
  • Annual Percentage Yield (APY)

    1.85%

  • Minimum balance

    None

  • Monthly fee

    No monthly maintenance fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    $10 per transaction

  • Overdraft fees

    $25

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes, if have an Ally checking account

Terms apply.

Look for opportunities to increase your income

Earning more money (while keeping your expenses the same, of course) can give you room to contribute more money to your emergency fund, which means you can be on your way to a fully-funded account much quicker.

There are a few different ways you can increase your income. If appropriate, you can consider asking for a raise at your current employer. Or look at taking a higher-paying role at another company (though, getting a new job is often easier said than done).

But if you'd rather stay put at your current company, you can still consider taking on freelance work or starting a side hustle to earn some extra cash. Alternatively, you might put a few items you no longer care for up for sale on an app like Depop, where some top sellers earn anywhere from $1,500 to $2,500 a month reselling clothes.

Due to factors such as time or other obligations, taking on a side hustle may not be feasible for everyone. But there are still other options for rebuilding your emergency fund a little quicker.

Examine your budget and find opportunities to re-route your money

If earning more money isn't doable for you at the moment, it may be time to take a look at your budget for areas of unnecessary spending.

"If you're rebuilding your fund and simultaneously taking care of other financial goals, something has to give," Ripp said. "The first place to look may be subscriptions you're being automatically billed for each month. It's possible you may not be using a subscription you're paying for, or there may be some you'd like to keep but don't mind pausing for the time being."

Examine your discretionary spending and figure out what you really love and what you actually don't care for. You may be surprised by how much you spend each month on things you think are just "meh." You can cut back on spending on those "just okay" expenses and throw the money you save at your emergency fund.

And don't forget to be patient with the process. Most people won't be able to recoup their emergency savings in a month or two, but diligently contributing to the fund each month can go a long way.

Bottom line

Your emergency fund is meant to be used for unexpected expenses — so don't feel guilty or beat yourself up for actually using your money. However, it's important to start rebuilding your emergency savings until it's fully funded again. This can allow you to avoid going deeper into debt or withdrawing from investments when a future emergency pops up.

While it may be tempting to keep building your investments or work towards other financial goals, in some cases you may want to hit pause to prioritize your emergency fund for a while. Ignoring this cash reserve can wind up costing you more in the long-run. Also, re-evaluating your budget and re-directing money from expenses you don't care about can help you grow your emergency fund even quicker.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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