Building Your Emergency Fund
If you’re not prepared, an unexpected expense can
have a significant impact on your finances. A leaky roof or car trouble,
for example, can easily translate to a bill in the thousands of
dollars. Or worse, the financial impact arising from a sudden job loss,
death of a spouse, disability, separation or divorce can be even more
When you need access to cash for an unforeseen
expense or significant life event, where will it come from? If you don’t
have money to fund the unexpected, you might have to resort to credit
cards, loans or even your personal retirement savings – all of which
could jeopardize your financial future. While insurance can be helpful
for certain emergencies, it’s important to have a dedicated source of
funding to weather a financial storm.
emergency fund is a pool of money that is set aside specifically to
cover the cost of unexpected expenses, or the loss of income. From time
to time, events will happen to disrupt your finances. If you don’t have
an emergency fund, you might be forced to sell investments at an
inopportune time or pay the expenses with costly credit card debt.
much should you set aside? Consider keeping at least three to six
months’ worth of living expenses in your emergency fund to cover
unexpected expenses. It may seem like a daunting goal, especially if you
have accumulated debt, such as a mortgage. However, by contributing
regularly to a savings or a Tax Free Savings Account (TFSA), you can
work towards your goal over time. Consider making deposits to your
non-registered investment account and allocating a portion of the assets
to a short-term savings vehicle to build your emergency fund.
Consolidating existing smaller accounts can also make it easier to
manage a contingency fund.
To calculate your living expenses, add
up your recurring monthly expenses (rent or mortgage payment, utility
bills, car payments, etc.). While you will also have discretionary
expenses to consider, you can cut back on those in an emergency when
cash is in short supply.
Add and Replenish
you’ve started your emergency fund, look for ways to build it more
quickly. For example, if you get a raise, consider increasing your
contribution amount. In the case of larger cash receipts or windfalls,
such as a bonus at work, an inheritance, or even a tax refund, consider
directing the surplus cash into your emergency fund rather than spending
it. Once you’ve paid off your mortgage, consider redirecting some of
your additional cash flow towards building up your emergency fund. And,
if you need to access the money in your emergency fund to cover an
unexpected expense, make sure to replenish the account as quickly as
Invest and Grow
you won’t know when you might need to tap into your emergency fund,
you’ll want to keep it in an account that is fairly liquid, so you don’t
end up paying penalties, charges, termination fees or significant
taxes. A TFSA may be a good option to accumulate your emergency fund
savings as the funds grow taxsheltered and can be withdrawn tax-free at
any time. To keep the funds liquid, consider investments such as a
high-interest savings account, money market funds, short-term Guaranteed
Income Certificates (GICs) or cashable GICs, treasury bills (T-bills)
and short-term bonds.
Discipline is Required
in mind that the money in your emergency fund is there in case of an
emergency – not to fund a family vacation or for discretionary
purchases. In addition, large expenses you know will be coming up – such
as a major purchase or income tax instalments – should be budgeted for
separately from your emergency fund.
an adequate emergency fund in place provides a sense of security –
knowing that you have the funds available when life’s unexpected
expenses arise. Give us a call to discuss incorporating an emergency
fund into your financial plan.