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I don’t think I’m alone in not having had an Emergency Fund for the past 35 years of my life. I read recently that 21 percent of Canadians have less than $1000 put aside for emergencies. 21 percent!! Until last year, I fit right into that category! But not anymore!!
Today we are going to break down a couple of different types of Emergency Funds, where to keep the money, and when to use it!
What is an Emergency Fund?
It’s simple! An emergency fund is savings. Ok, maybe not quite that simple. Your emergency fund is savings that you hope to never use, but have as a just-in-case umbrella for when the rain comes. And it will come, so let’s get prepared!
If you have debt, start out with a mini-emergency fund of a thousand dollars. Once the debt is gone (YAY!!), you want to bulk up your emergency fund to three to six months worth of your monthly expenses. (More about that later!)
The emergency fund is also a way to help you break a credit card habit. When something comes up, but you don’t have any savings, you will be tempted to turn to plastic. No, thank you!
It is for when situations arise that you really couldn’t see coming. Like if you have a flat tire and have to replace it. Or you get hit with an unexpected bill or miss work due to a medical emergency.
Bottom line, your emergency fund (mini or fully-funded) is there to help you when the unexpected hits.
The Mini Emergency Fund
If you are working on getting out of debt – this is the name of your emergency fund game. And the amount might be lower than you think.
One thousand dollars. That’s the magic number.
A mere thousand dollars is a perfect sized cushion between you and any emergencies that pop up while you are paying off debt.
NOT a new pair of shoes.
Or concert tickets when your favourite band comes to town.
NOT groceries when you decide you don’t want to stick to your budget this month.
Or a last minute weekend get-away.
But, you might say, one-thousand dollars isn’t enough to cover those expenses! You are right. It’s probably not. It’s enough to get through most day-to-day type expenses and to keep you from reaching for your Visa when your washing machine quits mid-load!
What if I’m scared?
Feel the fear…and do it anyways!
I hear a lot of people say that they have more than a thousand dollars in savings – they don’t feel good about their finances without $15,000 tucked away for a rainy day, yet they carry tens of thousand dollars in debt and pay hundreds of dollars in interest each month!!!
Here’s your challenge: if this is your situation, a pile of debt and a pile of rainy day money, I want you to take all but $1000, and use it to pay off your debt!
Scared? Good! Uncomfortable? Even better!
The low amount of this fund is not meant to give you peace of mind. It’s intended to light a fire under you to hustle HARD on paying your debt off.
When you take that extra $14000 and use it pay off debt, you are doing something amazing. Taking charge of your money and committing to getting OUT of debt, as fast as you can. You just upped your motivation to getting the debt gone, and the emergency fund built back up!
I have zero dollars in savings. What do I do?
It’s time to get started!
If you are like me, you are starting from zero. We had zero dollars in savings when we began our financial fix. So our very first goal was to save $1000.
How do I do it?
We started from scratch. Zero dollars in savings. How did we save a thousand dollars? (And how are we currently saving our fully funded?)
We did everything we could to pull together $1000, and then tucked it into a bank account that we don’t use, so we weren’t tempted to spend it!
What is a fully-funded emergency fund?
Once you are entirely out of debt, you are going to take that mini, thousand dollar emergency fund and you are going to boost it up to be 3-6 months worth of expense. I can’t tell you how much that amount should be – it depends on how much money you spend each month and how stable your job is.
For us, our jobs are both relatively stable (knock on wood) so we are erring on the three-month side of things. But if you work for commission, or work in an industry that faces layoffs or downtimes, I’d recommend leaning towards the six-month end.
I can’t tell you an exact amount to save, because it’s dependent on your expenses. NOT your income, mind you. Add up your total expenses – housing, insurance, food, car – everything you HAVE to spend in a month.
Now multiply that by three, or four, or six. However, many months will give you peace of mind.
To be honest – peace of mind is what this is all about. In other words, find a number that will make you feel financially comfortable, and set that as your goal.
Why do I need it?
At this point of reading you might be ready to hit that x and close on out of this post, thinking to yourself that you’re covered, you’ve never had an emergency (lucky you!) and this is an unnecessary step in financial planning!
Stop! Don’t leave yet – because you NEED this. To protect your family and your future. Have financial security. Get out of debt, which is a goal I know SO many of you have!
You might go an entire decade without needing your emergency fund, but the time will come when you DO, and you’ll be SO happy to have it!
This money is there to make sure you never wind up in debt again and to cover you in case the worst happens. You lose your job suddenly. You face a massive medical expense. Your sewage line backs up, and insurance doesn’t cover it. (This happened to friends of ours recently…blech!)
I HATE typing this list of reasons because it makes my heart sick to think about these horrible things ever happening. But I want to scare you a little bit because I think a lot of us live like with the attitude “It will never happen to us”.
Sorry to be the bearer of bad news – it will. So let’s get prepared!
Where should I keep it?
The financial experts in the world seem to generally agree – keep your emergency fund in an account that you can access without penalty, but that isn’t at your immediate disposal.
So NOT in your everyday chequing account, but also not in an RRSP or a different investment account.
No, this chunk of money isn’t going to make a lot of interest in a regular savings account, but this money isn’t there to make you passive income to retire on. It is simply there to be an umbrella between you and an emergency that could cause you to turn back to debt!
When do I use it?
Tricky stuff. This money might be a temptation. Having fifteen thousand dollars in an accessible bank account might lead some people to do something crazy. Family vacation-crazy. Or new car-crazy.
Your emergency fund isn’t there to pay for things that you really want, like vacations and new cars.
Likewise, it’s not there to pay for things you should have built into your budget. If you know your roof is going to need to be replaced in a few years, you should start saving for that now. Any home repairs or long-term car replacements or vacations – all the foreseeable budget items that you need to save for.
It is there for a true emergency. A situation that you can’t plan for and can’t pay for within your budget. The bad things that we all hope never happen.
Ok, friends. I think that’s the big, (maybe overwhelming?) scoop on emergency funds. Are you ready to get started?
Next week we are going to give you the low-down on how to save that first $1000, so make sure you join our mailing list and follow along on FB so you don’t miss it!
Plus, grab our free Emergency Fund Tracker here: