Do You Have An Emergency Fund?
We are in a time where mass layoffs resulting in home foreclosures and bankruptcies are all too familiar. Despite the very real possibility of this, many people still do not have any interest in building an emergency fund. Most people do not think they need one; they don’t think an emergency could happen to them.
The reason is simple: Why have the cash sitting, earning minimal interest, when you can have it in a more lucrative investment? An emergency fund for me is three to six months of income, sitting in a low-interest savings account.
Why an Emergency Fund is important
According to the folks over at Vanguard, the most common emergencies people face are job loss, medical or dental, home repairs, car repairs, and unplanned travel. Emergencies happen, and they cannot be avoided; the headache, however, can be.
There are two types of emergencies. Short term, and long term. A water heater dying in the middle of winter, would resemble a short-term issue, which you would need to fix immediately, especially if you live in Canada. A job loss, however, is a more long-term issue which would require substantially more capital. How much you need is based on a number of personal factors.
Long-term emergency budget
Look at your existing budget, and divide it up into Necessities, Wants, and Savings. The necessities are expenses you can’t avoid, i.e., mortgage payment, heat, hydro, food. Wants are things you can live without if you had to, i.e., gym membership, eating out, etc. During an emergency, savings need to be put on hold.
You now know how much it costs to live your life at the most basic level, and with that information, you can calculate how much you need in your emergency fund.
Assess your situation
The most disastrous emergency is the loss of income. How stable is your job? Are you a unionized government employee, or a commission only salesperson in a single income family? How long would it take you to find a new job if required?
An emergency fund is great because if faced with a job loss, you may not be forced to accept the first available job just to pay your bills.
Every household has a different situation, but a general rule is; the more people that depend on your income and the less stable that income is, the larger your emergency fund should be.
Keep in mind, if you lose your job you may be entitled to severance pay, as well as unemployment insurance. However, these never add up to 100% of your salary.
You may not need an emergency fund if:
- You have excellent insurance
- You have no debt
- You have multiple sources of income
- You have a large, low-rate line of credit or investments that can be exchanged for cash quickly (liquid)