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• Most people know they should have an emergency fund, but knowing when to use it can be tricky.
• Typically, you want to cover three to six months of expenses, but sometimes you might need more.
• Job loss, the death of a loved one, and insurance deductibles are all good reasons to use your funds.
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There is a saying in the wealth management industry: the only safe things in life are death and taxes. Something I would add to the list is financial emergencies.

Unfortunately, most Americans also do not have the disposable income to prepare for these emergencies. Or, in my experience with clients, don’t believe a catastrophic event will happen to them in the first place. Regardless of the scale of the crisis – whether it is as small as your broken down car or as large as your family is displaced by a natural disaster – having an emergency fund is essential.

I think you should aim to cover three to six months of expenses in your emergency fund, and you should be wary of looting your stash for non-essential emergencies. But how do you know when it’s really time to open the piggy bank?

Here are three scenarios where it is absolutely time to build on your emergency fund.

1. Job loss or transition

The main reason to access your emergency reserve is an unexpected job loss (or even a planned job transition). Sadly, countless Americans have been forced into this reality during the COVID-19 pandemic.

While our three to six month cash reserve recommendation is valid for everyone, I have long encouraged some professionals to save even more because of the high turnover rates in their particular field. For example, nurses, salespeople, accountants, software developers, and sales professionals tend to change jobs often, even before the pandemic hits.

Of course – after the pandemic – no one was immune to layoffs or time off. Surprisingly, even the doctors were not safe in their role. At the start of the pandemic, a survey showed that up to 21% of doctors surveyed suffered pay cuts or were put on leave due to COVID-19.

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

2. Insurance deductibles and waiting periods

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

Home insurance deductibles have a wide range that can vary from policy to policy: they can range from $ 250 to $ 2,500. Wealthier people or those insured in rural areas might pay even more than that, since their deductible can be expressed as a percentage of the amount of coverage desired.

For example, I looked at the home insurance policy of a client who had home coverage of $ 600,000 and her deductible was 1%. This means that she must pay a deductible of $ 6,000 on her claim.

In addition to deductibles, you’ll also want to factor in waiting times in insurance policies. For example, disability and long-term care policies provide for waiting periods as short as 30 days or up to a year before benefits begin. If you are unlucky enough to be in any of these situations, having enough reserves to hold you back until the waiting period expires is a must.

3. Unexpected death

One of the most disruptive events in life – both emotionally and financially – is an unexpected death. In addition to trying to fill that emotional void left by a loved one or the one you leave behind, usually an estate needs

liquidity

.

Taking the advice of a financial planner and obtaining life insurance for this event is not an immediate solution; life insurance companies typically take anywhere from two weeks to 60 days to process a claim. This is assuming that they receive all the necessary documents on time, and that no further investigation is necessary.

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

While it may be tempting to dip into your emergency fund for vacations and shopping sprees, I encourage you to think of this money as self-funded insurance for a financial emergency. You are hiding money in case something terrible happens, so you won’t have to go to a predatory payday lender, suffer wear rates on credit cards, or sell off credit card assets. unexpectedly.