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Outside the Box: Did you tap into your emergency fund? Don’t panic. 7 steps to build it back up.

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One of the first pieces of financial advice you may hear is to build up an emergency fund, anywhere from three months to a few years worth of expenses, and doing so is an impressive feat. 

The point of that money is to protect you when you hit hard times. So if you do hit hard times, you shouldn’t be afraid to use it.

Some people may be reluctant to use the money, even if they need it, said Daniel Lee, director, financial planning and advice, BrightPlan, a financial wellness benefit provider based in San Jose, Calif. They don’t like to see that balance begin to evaporate.

“If you are in need of your emergency fund, tap into it…that’s what it’s there for,” Lee said. “If you’re looking for a new job, feel free to use the cash in your emergency fund. Revisit your budget.”

If you’re an older worker who has been laid off in your 50s or 60s, you might just need those funds until you either find another job or source of income or decide to retire, at least for now.

Maybe you won’t take the trip you were planning or you’ll find other ways to cut your expenses. If you’re ready to retire, or almost ready, you might draw down from your emergency fund or any other cash reserve you have. In that case, you’ll eventually need to replenish it, say financial planners and other financial experts.

“If you have a cash flow crunch, that’s what the emergency fund is for so there’s no need to feel bad about tapping into it,” Lee said. Yet, if you’re not used to seeing the balance shrink, “it can start to feel uncomfortable.”

Ultimately, you should have a plan. Will you replace funds through income such as from a new paycheck or business you start or, if you’ve claimed your Social Security retirement benefits, will you replenish from that income? Or, will you keep your portfolio sufficiently balanced so that you can use money from a short-term bond fund to replenish the rainy-day and/or emergency fund?

Some people will sell certain investments at a profit and pay capital-gains tax in order to rebuild their funds. 

Here are six steps for replenishing your emergency fund:

Consider your overall financial situation. Whether you’ve already retired, are planning to retire soon, have lost a job through a layoff or a buyout, evaluate all your expenses and sources of income. Once you know what your resources and expenditures are, you’ll be able to calculate how much money you can move to your emergency fund, if any, under your current circumstances. If you decide, for example, to look for work, you may only be drawing down from your emergency fund temporarily. If you are unable to or not interested in returning to work, that will dictate your next steps.

Minimize your spending. “It’s important to stretch your emergency fund,” said Lee. For example, if you have $30,000 in your fund, rather than spend $5,000 a month, drop your spending to $3,000 a month. Evaluate precisely expenditures that aren’t essential compared to those that are. If it’s lattes you buy regularly, maybe limit them to once a week or once a month. If you’ve been dining out two or three times each week, cut back to special occasions or once a week, whichever helps you cut spending without becoming so frugal that you’re miserable. Check your cable bill or combination cable and phone bill to see if a different plan can save you money. See what subscriptions you may be paying for that you no longer want or need. Go over all your insurance policies line-by-line before you renew to be sure you need the amount of coverage you have.

Use your Social Security. If you are 62 or older, you are eligible to tap your Social Security retirement benefits. If you do, you will receive a smaller benefit than you would at your full retirement age of 66 or somewhere between the age of 66 and 67. If you were born in 1960 or later, your full retirement age is 67. Yet, you can “pause it,” said Lee, referring to the option to “suspend” your retirement benefits.

For example, say you lose a job at 63 or 65, and are still looking to stay in the workforce. You can claim Social Security, then suspend your benefits if and when you do find work. However, until you reach your full retirement age, there’s a limit on how much you can earn while receiving benefits. If you have not yet reached your full retirement age when you claim, you may be subject to the earnings test. (Learn more about that here.)

If you have gone back to work after claiming, contact the Social Security Administration at 800-772-1213 to report your anticipated earnings.

Spousal benefits are another option, which are available to a spouse beginning at age 62. A spousal benefit can be half of the worker’s benefit. Make an appointment at your local Social Security office to get information about your specific situation rather than calling by phone. Or, make an appointment to speak with a Social Security specialist by phone rather than with someone at the call center. Find your local Social Security office here.

”Sometimes you just need the money,” Lee said. “It’s there for you” once you hit 62. Be aware that if you don’t suspend your benefits, they will lock in at approximately 30% less than if you waited to at least your full retirement age. 

“Do you start taking Social Security sooner than you were thinking so you can avoid having to sell investments? There’s not one right answer,” said Roger Young, vice president, senior retirement insights manager, T. Rowe Price. If you wait to claim until after your full retirement age, you will receive delayed retirement credits of 8% per year. If you are able to wait until 70, you can use some of the funds to replenish your emergency fund.

Revisit your portfolio. If you have uninvested cash in any of your accounts, you can use some of that to replenish your emergency fund. Or, say you’ve used up three months’ of your emergency fund, you could sell other types of investments to “shore that back up,” said Young. Hopefully, there will be a “one-year downturn, not a four-year downturn. If you have a balanced portfolio you can take from investments that have lost less.”

Consider selling fixed-income investments. If you purchased Treasury inflation-protected securities or Series I savings bonds, and have held them for a considerable period of time, you might tap those to replenish your emergency fund. Or, if you have traditional certificates of deposit (CDs) or brokered CDs that have reached maturity, you can use those funds to rebuild your emergency fund. Avoid selling CDs before maturity date or you may pay a penalty, depending on the terms of the CD.

Use your income tax refund. If you receive a federal or state income tax refund on your 2022 tax return in the spring, and many people do, consider putting all or part of it into your emergency fund rather than spending it on a vacation. According to the Internal Revenue Service, the average 2021 refund was $3,039. (If you have credit card balances at high interest rate, use your tax refund to pay any credit card debt off first.)

Automate your savings. It’s convenient to allocate and pay a regular amount to your emergency fund by automatically sending a specific dollar amount to your emergency account. Yet, if your have an uneven cash flow, be careful, said David Sieminski, senior policy adviser in the office of community affairs at the Consumer Financial Protection Bureau.

“It’s really important to have a handle on your budget,” he said. “What’s your cash flow on a regular basis? Look at your necessary expenses. Trimming back on them gives you the opportunity to replenish your emergency fund.”

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