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Q&A with Sarah and Cyndy – How much do I need in my Emergency Fund?

By Sarah Chisholm, Financial Advisor

Do you have any funds set aside as an emergency fund? Have you updated your emergency fund amount to keep pace with inflation? How much should you have set aside?

What are the benefits of an emergency fund? When there is a serious sickness or injury, death in the family, job loss, or an unexpected major expense an emergency fund is an important backstop to protect your family. Cash could be used to pay rent while you are on the job hunt. If a loved one is hospitalized the emergency fund provides flexibility to cover the missing pay cheque and cover additional costs such as hospital parking fees, extra daycare costs and time off work to be with your loved one. An emergency fund provides you with flexibility. It reduces your stress in an already stressful time.

How much should I have saved in my emergency fund? A good starting point is setting aside three to six months of expenses, but is this achievable? An emergency fund does not need to cover all your monthly expenses. Instead, the fund should replace your fixed costs such as food, housing, and transportation. Discretionary expenses such as eating out, gifts and clothing can often be eliminated in the short term. Other outflows such as contributions into retirement savings accounts or education savings accounts can also be paused – take care of the emergency first – then re-start the retirement savings. Run the numbers to see what 3-6 months really looks like for your family.

What if I have existing consumer debt? Work towards paying off your consumer debts and making sure those credit card balances get paid off in fully monthly. As you pay down the balances – you are making more credit available – which could be used as a last resort for emergencies until your cash emergency fund is created.

Can I earn interest on my emergency fund? With interest rates being so high, make sure that the high interest savings account you are using provides a competitive interest rate. A financial advisor can often build your emergency fund into your Tax-Free Savings Account or Non-Registered account using a high interest savings fund that is safe and liquid. Keeping the emergency fund separate from your daily banking account can also reduce the tendency to spend your emergency fund on non-emergencies.

Can I insure the risk? Some emergencies are health related – a disease or injury can cause time off work and a death will change a family immediately. Consider using insurance along with an emergency fund to protect your family. Disability Insurance and Critical Illness coverage can provide protection from loss of earnings or a life-threatening condition. Health benefits can also provide access to paramedical practitioners to help recover from injuries or drug coverage to ensure a safe recovery. Life insurance provides a lump sum to the beneficiaries which can be used as desired, potentially to pay off a mortgage, create a buffer for a grieving period or create funds for a child’s future education. Chat with a trusted financial and insurance advisor to discuss your risk coverage needs and existing coverage.

What if I already have an emergency fund? Congratulations! This gives you the flexibility to start planning for short term and long-term goals. Try creating a sinking fund for large purchases. Set aside funds monthly and when the fund is big enough, take the vacation or buy the new furniture, then start rebuilding the fund for the next big purchase. For retirement consider increasing your contributions to your Registered Retirement Savings Plan or Tax-Free Savings or putting extra funds towards your mortgage to pay it off sooner.

Still not sure where to start, consider chatting with a financial advisor to look at your unique situation and create a personalized strategy.

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