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Chris Fry
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Connie Taccone

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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 devastating.

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.



Be Prepared

An 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.

How 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

Once 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 possible.



Invest and Grow

Since 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

Keep 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.



Getting Started

Having 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.