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?
Most personal finance experts will tell you that you need between 3-6 months of living expenses saved in an easily accessible Emergency Fund. Having cash as a cushion is always a good idea – but when you run into hard times, it’s how you choose to spend your emergency savings that can mean the difference between getting through your financial crisis, or having to make some truly difficult decisions.
You might already have a budget created for your monthly expenses, but having a budget in order to deal with a financial emergency is also really important – and creating one before a crisis hits will make it a lot easier for you to make the transition.
Over the past weekend, I took a hard look at my finances and created a bare-bones budget for my current situation. Employment Insurance will just be enough to cover all of my expenses – mortgage, strata, hydro, cell phone, internet, car insurance, and about $100/month for groceries. I’d love to be able to get through this without having to touch my Emergency Fund – but I’m pretty realistic and know it’s likely not possible. But my stress level is significantly lower knowing that I’ve got some money in the bank set aside for exactly this kind of situation.
Here are a few tips on how to create a bare-bones budget:
Fixed vs. discretionary expenses
Typically when creating a budget, you would divide your categories into two separate spending groups – fixed and discretionary. Fixed expenses can also sometimes be reduced, but may require a longer time to see any benefit – such as waiting for a lease to run out in order to move to a cheaper apartment. This means the easiest way to lower your budget is to focus on your discretionary spending.
Here is what my bare-bones budget looks like compared to my current February 2014 budget:
You can see, I was able to eliminate $765 from my monthly budget without too much problem. And I know that if needed, I could cut down my budget even further. For the next few months I will use this budget as a guide for my monthly expenses, but if it gets too tight, I can eliminate internet, lower my cell phone bill, and get rid of my car insurance. That would likely save an additional $180/month.
Dealing with debt
I’m extremely thankful that I don’t have any debt, aside from my mortgage. However if you’re in debt, you generally cannot escape your debt repayments without serious repercussions. You might be able to call each creditor to inquire about lowering your payments until you can get back on your feet. And if you have debts that are tied to a car, boat, motorcycle, etc. – you might need to consider selling and putting the money towards the loan instead. There’s a chance you could end up taking a loss in the process, but eliminating or reducing your monthly payments might leave you ahead in the long run.
Defer if possible
Many expenses cannot be avoided, even when you’re in a financial crisis. If you can, avoid replacing or paying to repair the items until you’re back on your feet. For example, if you microwave or dryer has broken, re-heat your food on the stove and hang-dry your clothing instead. You might not be able to get away without fixing your refrigerator, for example, but make sure to look for alternative solutions too. If a friend or relative owns a small fridge, or has a spare one in the garage, ask to borrow it until you can get yours fixed.
Once you start putting the numbers on paper, you can start to see how much money you will need to spend each month, and how long you can live off of your savings.
While I have been able to do a lot for myself to make sure I’m okay financially while I’m laid off, I can’t put a price tag on how much my friends, family, and BF are keeping me sane. And the positive and thoughtful blog comments, texts, tweets, and e-mails I’ve gotten from so many people have really put a smile on my face. So thank you. It’s really, really appreciated. :)
Do you have a bare-bones budget created in case of an emergency?
I haven’t had to use my Emergency Fund since 2010, when I was looking for work. But this week, I will have to take out about $1,000 to cover some costly (and unexpected) expenses.
First, my MacBook Pro’s logic board died. The repair cost is going to be just over $600, and I’m going to be without my computer for a week. I really wanted to get a new laptop, but at this point, it’s just not worth it. My current MBP is fine, and if I were to get a new one, I’d be paying over $3,000 instead of the $600 it would cost just to fix the one I have. Perhaps in 2014 I can look into getting a new computer.
Second, my car windshield cracked. I was moving a bed to a friend’s house when the car in front of me made a sudden left-hand turn without using their turn signal. I had to slam on my brakes … and a piece of wood slid from the back of the car all the way to the front and cracked the windshield. My deductible is $500, and the quotes I have been getting for the repair are around $400.
Thankfully, I should be able to get that money back into my EF relatively quickly. But it’s still a pretty crappy way to start off 2013.