5 Essential Criteria for When to Use Emergency Funds and Savings
Knowing when to use emergency funds is one of the most important aspects of personal finance. It’s the difference between having a safety net and accidentally falling into a debt trap. In this guide, we will explore the rules of engagement for your savings.
What is an Emergency Fund and Why Do Our ‘Hands’ Itch to Use It?
Simply put, an emergency fund is money specifically set aside to cover living costs or urgent, unexpected expenses. Unlike your regular savings account that you might be building for a new bike or a wedding, an emergency fund is a personal ‘insurance’ you create for yourself. Unfortunately, many of us still mix the two up and struggle with when to use emergency cash vs. regular savings.
The difference between an emergency fund and regular savings
Regular savings are goal-oriented. You save because you want to achieve something. On the other hand, an emergency fund is safety-oriented. You save it specifically with the hope that the money will never actually be used. The problem is, once the balance hits the millions, our psychology often treats it as ‘idle money.’ In reality, that money is working hard as your future protector.
The psychology of ‘self-reward’ that often threatens emergency funds
The term self-reward is frequently used as a justification for impulsive spending. “I’ve worked so hard this month, surely I can pull a little from the emergency fund for some new shoes.” This line of thinking is a total trap. We often feel entitled to use that money as a reward for our hard work, without realizing that the best gift we can give ourselves is financial security. Understanding when to use emergency funds helps us fight this ‘itchy hand’ impulse with solid logic.
Fact: Gen Z individuals in the US with sufficient emergency savings for three months of expenses — 43 percent (2024) — Source: Bank of America
5 Main Situations When to Use Emergency Funds
Knowing when to use emergency savings doesn’t have to be complicated. Generally, there are five pillar situations agreed upon by financial experts as valid reasons to tap into these savings. If your situation doesn’t fall into one of these categories, you should definitely think twice before pulling money out of the account.
Fact: Millennials in the US with sufficient emergency savings for three months of expenses — 51 percent (2024) — Source: Bank of America
1. Sudden loss of income or layoff
This is the most classic and strongest reason for when to use emergency money. The job market is never certain. Company downsizing or business closures can happen at any time. When your monthly paycheck stops hitting your account, your emergency fund acts as a financial lifeline to cover rent, installments, and daily living costs until you land a new gig.
2. Critical health conditions not covered by insurance
Even if you have health insurance or a private plan, there are often unexpected extra costs. For example, transportation to a distant hospital, specific medications that have to be bought out-of-pocket, or medical expenses for family members without insurance. In life-or-death situations or permanent health issues, this is exactly when to use emergency funds for recovery.
3. Repairing crucial work tools (Laptop/Motorbike)
For a freelance graphic designer, a laptop isn’t just for fun—it’s a money-making machine. If the laptop completely dies and can’t be fixed without a major expense, that’s an emergency. The same goes for ride-hailing drivers whose bikes are badly damaged. As long as the tool is the primary instrument for generating income, using the fund is a wise move when deciding when to use emergency savings.
4. Urgent needs of immediate family members
Family values are deeply rooted in our culture. Sometimes, parents or siblings face misfortunes that require quick financial support. As long as the help is crucial (like school fees that are at risk or urgent medical bills), you can consider stepping in. However, make sure you stay smart about managing your family’s financial buckets so your entire fund doesn’t vanish for someone else’s problems.
5. Disasters or natural calamities damaging assets
Floods, earthquakes, or fires are extraordinary situations. If your home is affected and needs immediate repairs to be livable, or if you need to evacuate to a safer place, don’t hesitate to use those funds. This is the true definition of when to use emergency money—when the foundation of your life is being shaken by nature.
Use the 3-Question Test: Is This Really an Emergency?
Still unsure if your current situation counts as an emergency? Before opening your banking app, take a deep breath and ask these three “U-U-N” (Unexpected, Urgent, Necessary) framework questions. This framework is super effective in helping you decide when to use emergency funds without any regrets later.
| Question | Explanation | Emergency Example | NOT an Emergency Example |
|---|---|---|---|
| Is it unexpected? | Something completely outside your plan and annual calendar. | Motorbike tire blows out while heading to work. | Paying annual motorbike taxes. |
| Is it urgent? | If not resolved now, there will be fatal consequences or higher costs. | A major pipe leak at home flooding the room. | Wanting to renovate the kitchen because you’re bored with the color. |
| Is it a basic necessity? | Directly related to survival, health, or work. | Sudden appendicitis surgery costs. | Buying concert tickets for your favorite artist during a presale. |
If the answer to all three questions is YES, then you’ve found the answer to when to use emergency money. However, if there’s even one “NO,” it means it’s an expense you should have planned for through separate savings or by cutting back on other lifestyle spending.
Realistic Scenario: Broken Laptop vs. New Phone Promo
Let’s break down a real-world example often faced by students or young professionals. Imagine you have an emergency fund of Rp10 million.
Scenario A: The laptop you use for your thesis and side hustle suddenly smokes and dies completely. The service cost is estimated at Rp3 million. If not repaired, you risk graduating late and losing clients. Is it time for when to use emergency savings? The answer: YES. This is unexpected, urgent, and absolutely necessary for your future.
Scenario B: The phone you’re using now still works fine, it’s just the battery is starting to get a bit weak. Suddenly, your favorite brand releases a new series with a huge cashback promo that drops the price by Rp3 million. You feel this is an ’emergency’ because the promo only lasts 24 hours. Is this a moment for when to use emergency funds? The answer: NO. Even though there’s a time limit (urgent), it wasn’t unexpected (new phone launches always have a pattern) and it’s not a basic necessity urgent for survival.
In Scenario B, for those of you renting or living away from home, it’s better to apply budgeting tips for young renters by saving up slowly rather than touching your defense fund. Learning to hold back is part of financial maturity.
Fatal Mistakes When Using Emergency Funds
Knowing when to use emergency funds is only half the battle. The other half is how to use it responsibly. Many people correctly identify an emergency moment but fail in the execution, ending up with even bigger financial problems.
Draining it to zero without a backup plan
Never drain your emergency fund to exactly Rp0 unless you’re facing a total layoff. If possible, always leave a little balance just in case there’s an ’emergency within the emergency.’ Always think: “What happens if another problem pops up tomorrow?”
Forgetting to record the expenses taken
This is the most common mistake. Since it feels like your own money, many just withdraw without knowing exactly how much was used. It’s crucial to use an expense tracking app like MoneyKu. By recording every rupiah that leaves your emergency fund, you maintain full control and awareness of your financial health. In MoneyKu, you can see a clear visual summary, so you know exactly how big of a hole you need to plug later.
Having no commitment to top it back up
An emergency fund isn’t free money. Think of it as a loan from ‘future you.’ Once the emergency situation has passed, your top priority must return to ‘filling the tank’ mode. Don’t go overboard with spending or aggressive investing before your emergency fund is back to its ideal number. Without a top-up commitment, you’ll be extremely vulnerable when the next crisis hits.
FAQ: Common Dilemmas About Emergency Funds
Here are some questions frequently asked by young people regarding the boundaries and rules of when to use emergency funds.
Can I use my emergency fund for a close friend’s wedding?
The answer: Technically, no. A wedding or celebration is a predictable expense. You should ideally create a specific ‘Social/Gifts’ bucket every month. However, if the location is very far and you must go for essential family reasons, use other savings funds first before touching the emergency fund.
What if the emergency fund is used to pay off piling installments?
This is a sign that your monthly spending is already higher than your income. Using an emergency fund to patch up installments is only a dangerous temporary fix. Instead, use this moment to evaluate your lifestyle and look for additional income. Emergency funds should only be used for installments if you’ve just experienced a layoff.
What is the ideal time frame to replenish the emergency fund balance?
There’s no fixed number, but aim to have the balance back to full within 6-12 months. You can use annual bonuses, holiday bonuses (THR), or side hustle income to speed up the refilling process. Remember, the faster it’s full, the better you’ll sleep.
Should I start saving from scratch again or in installments?
Installments are better than nothing at all. Start with a small amount every payday, similar to when you first built the fund. Consistency is much more important than a large amount that only happens once.
Conclusion
In summary, understanding when to use emergency funds is the cornerstone of a healthy financial life. By using the U-U-N framework and avoiding common pitfalls, you protect your future self from avoidable stress. Make sure you stay alert to short-term temptations and use an app like MoneyKu to help you monitor daily spending so your emergency fund stays safe. With quick recording features and clear categories, you won’t be confused about where your money is going anymore. Keeping your emergency fund intact is the best form of self-love for your future self.
