3 times it's a good idea to use your emergency fund

There is a saying in the wealth management industry: The only sure things in life are death and taxes. Something that I'd add to the list is financial emergencies. 

• Most people know they should have an emergency fund, but knowing when to use it can be tricky.
• Typically you want three to six months of expenses covered, but sometimes you might need even more.
• Job loss, death of a loved one, and insurance deductibles are all good reasons to use your fund.

Unfortunately, most Americans either don't have the disposable income to prepare for those emergencies. Or, in my experience with clients, don't believe that a catastrophic event will happen to them in the first place. No matter the size of the crisis — whether it's as small as your car breaking down or as big as your family being displaced by a natural disaster — having an emergency fund is essential. 

I believe that you should aim to have three to six months' worth of expenses covered within your emergency fund, and you should be wary of raiding your stash for non-essential emergencies. But how do you know when it's actually time to break open the piggy bank? 

Here are three scenarios when it's absolutely time to lean on your emergency fund.

1. A job loss or transition

The No. 1 reason to access your emergency reserve is an unexpected job loss (or even a planned employment transition). Unfortunately, countless Americans were forced into this reality during the COVID-19 pandemic. 

Even though our three-to-six month cash reserve recommendation holds true for everyone, I've long encouraged certain professionals to save even more due to high turnover rates in their particular field. For example, nurses, retail associates, accountants, software developers, and sales professionals tend to change jobs often, even before the pandemic struck. 

Of course — after the pandemic — no one was safe from layoffs or furloughs. Shockingly, not even physicians were safe in their roles. In the beginning of the pandemic, one survey showed up to 21% of the physicians surveyed suffered pay cuts or were furloughed as a result of COVID-19. 

Therefore, no matter how secure you think your job is, the first step towards being prepared for any type of career transition is having adequate reserves and knowing when to use them.  

2. Insurance deductibles and waiting periods

Before most insurance contracts payout any claims, you will need to pay your deductible first. There might also be a waiting period before funds are disbursed. 

Homeowners insurance deductibles have a wide range that can vary from policy to policy: they can be as low as $250 and as high as $2,500. Wealthier individuals or policyholders in rural areas might pay even more than that, since their deductible may be expressed as a percentage of their desired coverage amount. 

For example, I reviewed a client's homeowners policy who had a dwelling coverage of $600,000, and her deductible was 1%. This means that she is required to pay a deductible of $6,000 on her claim. 

In addition to deductibles, you will also want to take waiting periods in insurance policies into account. For example, disability and long-term care policies have waiting periods as short as 30 days or as long as a year before benefits kick in. If you are unfortunate enough to experience one of these situations, having adequate reserves to hold you over until the waiting period expires is a must. 

3. An unexpected death

One of the most disruptive events in life — both emotionally and financially — is an unexpected death. Besides trying to fill that emotional void left by a loved one or the one you leave yourself, typically, an estate needs liquidity. 

Taking a financial planner's advice and obtaining life insurance for this event isn't an immediate fix; life insurance companies usually take two weeks to 60 days to process a claim. And that's assuming they receive all necessary documentation on time, and no additional investigation is needed.

In the meantime, utility bills and mortgage payments keep coming, not to mention the immediate income needs of survivors, or burial and funeral expenses. An emergency fund can take a whole lot of stress out of an already stressful situation.

While it might be enticing to tap into your emergency fund for vacations and shopping sprees, I encourage you to think of that money as self-funded insurance on financial emergencies. You're tucking away money in case something terrible happens, so you won't have to go to a predatory payday lender, suffer usury credit card rates, or sell assets unexpectedly.