2016 is the year of the emergency fund
Rob Carrick recently proclaimed 2016 as the year of the Emergency Fund. I’m a huge fan of having at least 3-6 months worth of living expenses set aside should you have to face any financial setback. Rob said it best when he wrote, “think of an emergency fund as insurance against a short-term setback that affects your long-term financial goals.”
— Rob Carrick (@rcarrick) December 14, 2015
My Emergency Fund isn’t something I have thought about much over the last couple of years. But I’ve certainly used it – like when I got laid off, when my laptop needed repairs, or when I accidentally cracked my car windshield and needed to pay the ICBC deductible. Then, once life settled back down, I topped the EF back up to its original amount, and stopped thinking about it again.
Right now my $10,000 EF sits in a high-interest TFSA – this represents about 5-6 months of normal living expenses, and it’s the amount I’ve always been comfortable with. I’m confident if I lose my job, I’ll be able to get a new one within a couple of months. And I don’t see a one-time emergency costing more than $10k at the moment (since I’m renting).
It took me 6 years to save up to $10,000. I started saving $25/month back in 2006, got to $5,000 in 2011, and finally hit $10,000 right before I left for Germany in 2012. It was not a fast process, and I had a bunch of setbacks along the way… but it was definitely worth it. So don’t feel discouraged if you feel like it’s taking forever to fund your EF (I felt that way too). Even just a little bit of cash saved up is better than nothing, and you’ll get there eventually. :)
Instead of keeping a chunk of money for emergencies, a lot of people will consider using a line of credit or a credit card if an emergency takes place. I personally really dislike the idea of going into debt in order to take care of a financial emergency, or relying on a bank to get you through. With cash, you don’t have to worry about payment schedules, interest rates, or creating a potential mountain of debt. Having your own money on hand gives you options. You can all of the shots, and that’s a huge step towards creating financial independence. And personally, I’m okay with the low interest rates in my “high interest” TFSA – because like Rob said in his article, “the emphasis is on safety over returns.”
Related: Creating a bare-bones budget
How did you determine what amount was right for your Emergency Fund?
Or are you using the line of credit/credit card method instead?
Author: Krystal Yee
I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.