We Raided Our Emergency Fund to Become Debt-Free. Then the Pandemic Hit

Photo to accompany article about when not to use your emergency fund.

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“Just another reminder that money is emotional and rarely rational,” I tweeted.

What could go wrong?

Last December, a couple weeks after musing about it on Twitter, I announced on Instagram that my husband, Peach, and I were officially debt free. 

We had made the emotional, irrational choice to pull more than $3,000 out of our emergency savings and apply it to his student loan balance. Each month we already paid considerably more than the minimum due. But this move wiped out the loan entirely—and therefore our debt. We would be entering 2020 debt free. 

This also left us with only six weeks of expenses left in our emergency fund. 

My advice has always been to have between three and six months worth of living expenses in your emergency savings fund—and that was before a global pandemic and recession. This is in line with many other personal finance experts who say income loss and huge, unforeseen expenses can occur at any time. 

Meanwhile, my husband and I were reveling in paying off over $51,000 in student loans between August 2018, when we’d gotten married and merged our finances, to December 2019. Going into the new year with a completely clean financial slate after barely a year of marriage felt freeing. Without the anchor of debt, we were ready to pivot all our attention to our wealth-building goals, instead of feeling as if we were forced to split our focus.

I remember flippantly saying at the time, “I want to do this, but I feel like I’m daring a recession to happen. I just hope nothing bad happens before we replenish this money.” 

Well, you can see the timeline. Three months later, our home of New York City (and the entire U.S.) was hit by COVID-19, throwing millions into physical, emotional and financial distress.

Here’s how I fixed it, and what I learned.

When Your Income Radically Changes

Of course I wasn’t immune to reality, and I watched in horror as my income started to plummet. Within the first two weeks of COVID-19, our household lost $10,000 of expected income as media outlets froze freelance budgets and speaking gigs were indefinitely postponed. I write books, articles and give talks on all things personal finance. I also collaborate with companies, and negotiations for brand partnerships that were just shy of contracts had a pin put in them while companies started to lock down their budgets. As a self-employed person, I’m used to a significant degree of volatility, but the uncertainty took on an entirely new feeling. 

What I Did Immediately

I leapt into financial triage.  

The move to pull a little more than $3,000 out of our emergency fund didn’t entirely gut our savings, but left us with a month and a half worth of runway. Enough for a short-term crisis, but not exactly the buffer needed to sleep well at night during a global pandemic in which my income prospects were bottoming out.

My first priority became preserving the cash in my business account as I scrambled to try and secure more work. My business account is how I pay all my business expenses and allot myself a monthly salary. The two ways to preserve the money in my business account were to minimize how much I invested into building my business, which impacted how much I was likely to earn, and reducing my salary. Similar to how some businesses reduced their employees’ incomes to minimize layoffs, I dropped my own income by 35 percent. Like many Americans, the swift change in income required that we reconfigure our household budget and reprioritize our current savings and investing goals. 

Why I Didn’t Tap My Emergency Fund

I wanted to try and avoid drawing down on our emergency fund too early because we weren’t sure how long the pandemic and subsequent recession would last. Fortunately, my husband’s job as a public school teacher was secure, so we had one stream of consistent income. 

After deciding to reduce my salary, we worked together to redistribute our new monthly income towards two priorities: paying bills and boosting emergency savings. This was a modified version of the “Bare Essentials Budget,” a budgeting model I always have prepared that shows us exactly how much money we need to cover our essential needs of shelter, food (for us and our dog), utilities, insurance payments, transportation, and medical expenses. (You can make your own bare-bones budget here.)

Your Bare Essentials Budget may be a bit different, and might include childcare or minimum debt payments. Having that information already mapped out makes it less stressful to pivot during a worst case situation. It also provides a guideline for exactly how much you need in your emergency savings fund. 

Again, before the pandemic, I typically recommended between three and six months worth of living expenses. Now, a year’s worth feels much safer. A challenging goal, to be sure, but one worth pushing towards if you don’t feel secure in the stability of your job.

Remember, the monthly living expenses in your emergency savings doesn’t need to be that of an ideal lifestyle, but rather what you need to cover the basics. 

Changing Our Savings Goals

Typically, we have separate savings goals for things like travel and short-term purchases, like new furniture. We redirected that money to our emergency fund too, since it was clear we wouldn’t be going anywhere for a while—and despite being sort of broken, our current couch was sufficient. 

It’s five months later now, and we’re still focused on rebuilding our emergency savings, which feels like an ever-moving target. Before the pandemic, I felt fairly confident in the security of our jobs, and three months of living expenses in savings provided enough of a buffer. But now, like millions of Americans, we have no idea what the long-term future holds for either of our jobs. 

Bottom Line

This experience has made me far more conservative with how much I personally want in my emergency savings—and taught me a crucial lesson to not defy my own financial advice.