diff --git a/tools/config.py b/tools/config.py
index 18640735a35aa..37eb8474421f2 100644
--- a/tools/config.py
+++ b/tools/config.py
@@ -77,6 +77,12 @@ def set_config_from_tool_location(config_key, tool_binary, f):
     exit_with_error('%s is set to empty value in %s', config_key, EM_CONFIG)
 
 
+def expandvars(value):
+  if type(value) == list:
+    return [expandvars(v) for v in value]
+  return os.path.expandvars(value)
+
+
 def parse_config_file():
   """Parse the emscripten config file using python's exec.
 
@@ -84,6 +90,7 @@ def parse_config_file():
   """
   config = {'__file__': EM_CONFIG}
   config_text = utils.read_file(EM_CONFIG)
+  os.environ['EM_CONFIG_DIR'] = os.path.dirname(EM_CONFIG)
   try:
     exec(config_text, config)
   except Exception as e:
@@ -132,7 +139,7 @@ def parse_config_file():
           exit_with_error(f'environment variable {env_var} must be an absolute path: {env_value}')
       globals()[key] = env_value
     elif key in config:
-      globals()[key] = config[key]
+      globals()[key] = expandvars(config[key])
 
 
 def read_config():
diff --git a/tools/config_template.py b/tools/config_template.py
index 195593ccefa7f..a77107533f09b 100644
--- a/tools/config_template.py
+++ b/tools/config_template.py
@@ -1,8 +1,9 @@
 # This file will be edited (the {{{ }}} things), and written to `.emscripten`
 # when emscripten is first used and no config file is found.
 
-# Note: If you put paths relative to the home directory, do not forget
-# os.path.expanduser
+# Note: Use can use environment variables in your settings, e.g. use `$HOME`
+# for paths relative to the home directory.  You can also use `$EM_CONFIG_DIR`
+# for the directory where the config file lives.
 #
 # Any config setting <KEY> in this file can be overridden by setting the
 # EM_<KEY> environment variable. For example, settings EM_LLVM_ROOT override
@@ -34,9 +35,8 @@
 #
 # JS_ENGINES = [NODE_JS_TEST] # add V8_ENGINE or SPIDERMONKEY_ENGINE if you have them installed too.
 #
-# import os
-# WASMER = os.path.expanduser(os.path.join('~', '.wasmer', 'bin', 'wasmer'))
-# WASMTIME = os.path.expanduser(os.path.join('~', 'wasmtime'))
+# WASMER = '$HOME/.wasmer/bin/wasmer'
+# WASMTIME = '$HOME/wasmtime'
 #
 # Wasm engines to use in STANDALONE_WASM tests.
 #