One of the best things you can do for yourself is create an emergency fund. This sacred pile of cash can give you comfort knowing that when unexpected expenses enter your life that you can handle them without risking serious harm to cash flows and set you back months, or years crawling back out of debt.
What is an Emergency Fund?
It is a savings fund that you have built and continue to add to (when possible) to save money for those unexpected expenses that come into your life. Some people reserve this fund solely for if they find themselves unemployed. Some use it more freely for expenses like major car repairs or for large unplanned home improvement projects like a new roof due to a sudden leak, or a major car repair due to a blown transmission.
How Much Should I Have in my Emergency Fund?
It is common for most to keep roughly 6 months of expenses in your emergency fund. This will depend on your risk tolerance and job security. If you work in a rapidly changing industry that has high turnover, or perhaps is very cyclical in demand than you may want to have a larger emergency fund than if you are in a stable job and industry. It will be important for you to have a very good understanding of your budget by doing a spending analysis so you can properly identify your fixed monthly expenses such as rent/mortgage, utilities, food, etc. If you ever get into a jam, the variable expenses like Internet and TV cable or car payment costs can always take a back seat (yes that means get rid of them).
For example, if your monthly expenses are $2,500 all in, then you need to save up 6 months, which will equate to $15,000.
Should I Invest my Emergency Fund?
Short answer is NO. The purpose of this is for emergency purposes. If you suddenly find yourself unemployed, how will you be able to manage bills if your money is locked in a GIC, or invested in non-liquid assets. Even if you are invested in the market there is always risk of losing money. Even though it’s difficult to look at those thousands of dollar bills sitting in a savings account every time you login, just keep reminding yourself that it is there for a reason!
What Should I use my Emergency Fund for?
I would only use my emergency fund if I fund myself unemployed. Some people will use it for large unplanned expenses like a major car repair, or a new furnace, but my thoughts would be why don’t you have a reserve fund for both of those as well? If you have an aging furnace in your home, then you know it will need to be replaced eventually, start putting away $100 a week in order to PLAN for the purchase of that… Same goes for car repairs. Cars are not cheap, so I would always want to make sure that I have a reserve fund for maintenance and repairs because they will creep up on me eventually.
Ways to Start Your Emergency Fund
- Start with $25/week – or whatever your budget can handle. Think about if you were to just start with $25 per week. After 6 months you could have generated $650. That’s a good chunk of change. What if you were able to double that in the short term for the next 6 months and put away $1,300 in emergency savings. You’re on your way!
- Save all your change every time you break a $20 bill. If you break a few $20 bills per week, think about if you saved all your change from that. All the $5, $10 and coins from that. You could be on your way to starting your emergency fund, even if it’s a few bucks at a time!
- Generate some additional income. If you are able to work a few extra shifts, or have a part time gig? Think about picking up another job to try and get yourself ahead. Maybe there’s some cash jobs on the side to start building up your emergency fund.
- Save your bonuses, tax rebates to start a substantial emergency fund. This is a great way to put a larger ‘donation’ into your emergency fund. If you get $1,000 or $5,000 back on tax rebates, or a great bonus; take that money and put it in your emergency fund!