One of the cornerstone’s of personal finance is that you should build an emergency fund and only use it for emergencies. However, I’ve had a hard time finding a specific definition of what constitutes an ‘emergency fund worthy’ emergency. I did some digging and found an article at msn money where one of the qualifications for an e-fund is “Only touch the money when you have a true cash crisis that is so unexpected or of such dire proportions that emergency is the only word for it”. One woman said that she would only use her emergency fund for “‘job loss, disability, severe medical issues or death.’” However, she had plenty of other money stashed with separate funds for the house, car, and miscellaneous expenses. However, if someone is just starting out on the road to personal financial freedom/security and presumably doesn’t have other savings’ funds that they can tap first, what kind of guidelines should they use? What if the emergency is caused by negligence or ignorance? What if an emergency leads to a longer-term financial commitment?

Here are some examples of grey-area emergency fund usage (at least to me):

Scenario 1: Let’s say that I break my leg while bike riding. Now I would consider the trip to the hospital, any x-rays, surgery etc. to be an emergency and thus would be paid for from my emergency fund. But what if I find out that I will need ongoing physical therapy (say six months to a year) in order to fully regain the use of my leg. Is the physical therapy still covered under the emergency fund, or should it be budgeted for with other funds?

Scenario 2: Let’s say you live in a rather rural area and the whole family uses the computer for schoolwork, take-home work, and household maintenance. Two months after your warranty expires, the motherboard gets fried for some unknown reason. Without the computer you’re unable to do work for your job, your kids can’t complete some of their homework assignments. Is this an emergency? If you had a very old computer (like I do) then this would have been an expected expense (and you would be saving accordingly), but if you just came off of a two-year warranty and have had very little problems thus far with your computer, this would be highly unexpected. Do you tap your emergency fund? If not, how do you explain to your boss why you can no longer do work from the house? What do you do about the kids’ schoolwork?

Scenario 3: After towing your car to the mechanic, you find out that your engine is shot because your timing belt broke (this actually happened to a friend of mine). Now while this may seem like an emergency, disaster could have been avoided had you taken your car in to get its oil change and 12-point inspection six weeks ago, since it would have been very clear that your belt was about to break. Do you repair your engine from your emergency fund money (if you’re just starting to build a fund, this could easily wipe it out).

For me, part of what determines when I can tap my emergency fund is: how much of an impact will the ‘emergency’ cause with my livelihood/health as well as how quickly I could pay the money back. Because there is some flexibility in my current budget, if a questionable emergency came up, I don’t think that I would have much of a problem using e-fund money as I could easily come up with the money to replenish the emergency fund in the ensuing months. While there is always the risk that I could have a bigger emergency while the fund is below its normal size, I don’t worry about this too much because I currently have very stable income and there really isn’t anyone depending on me. However, if I had a different job and/or children I might feel differently about the matter.

In the first scenario, I don’t think that there’s much to be done other than to adjust your budget to handle the physical therapy. Since the physical therapy would likely be on a pay-as-you-go plan it seems that finding the money in the budget might not be any more hardship than coming up with a repayment plan for the emergency fund. However, depending on how tight finances are it might make sense to have a split (first take as much as can be squeezed out from the budget and then take the remainder from the e-fund).

In the second and third scenarios, I think that the best protection is to be aware of the limits of your mechanical devices, especially if they are necessary for your employment. While it’s not always possible to predict when something will go wrong, it doesn’t hurt to be prepared for the eventuality that cars and computers often need repair. Coupling knowledge of your system’s potential service needs with a general maintenance fund might help prevent you from even wondering about tapping your emergency fund. Or you could just get a 10k vacation fund that you can tap at will, which I think would be my first choice.