Chuck Groot Financial Consulting

What’s in your emergency fund?

Your emergency fund is not a maybe or a “someday isle.”

The year 2020 has shown us the absolute necessity of an emergency fund. We cannot predict every challenge that will assail us. Planning is king. Whether we lose our job, get laid off, or get hit with an unexpected expense (car problems, need a new computer, fix a roof or washing machine, our family pet gets sick, or, worse, you get sick), we need to have something to fall back on. 

Have you or has someone you know:

  • lost their job?
  • had a routine trip to the dentist that turned into a root canal?
  • been involved in a car accident?
  • had a bigger than predicted tax bill show up?
  • had a baby that arrived weeks early?
  • had a pet that became significantly sick?
  • had to fly your family across the country for the funeral of a loved one?

The list of possibilities is endless.

Basically, an emergency is a little pot of money you have set aside that you don’t touch, but is easily accessible.

Did you know?

  • 13% of all homeowners had one or more late mortgage payments.
  • 22% of people overdrew their checking account.
  • 26% of people have unpaid medical bills.
  • Interest is the biggest contributor to debt.
  • 1/3 of all Canadians do not have an emergency fund.
  • Household debt has ballooned to 176.9% in 2020. In other words, for every $1 made $1.76 is spent.
  • The cost of living is climbing, and income has stayed stagnant.

How much should be in your emergency fund?

The jury is still out on that. Some advisors say three months of expenses; others say six months’ worth. You know your work scenario and if there are good times ahead or bad. You also know how old your appliances or vehicles are and when they may need replacing. Although you can’t really plan these 100%, you can certainly have a good idea of what may happen.

Of course, we can never plan on an accident or major injury. But the statistics are that 1 out of 4 people will have one before the age of 50, and usually, the younger you are, the higher the chance.

So plan on a 3 to 6 month supply of cash. You can start with at least 3 and build it up. This is what the government says you should use as a guide. Consider saving 3 months of these expenses:

  • home
  • heating and other utilities
  • food
  • clothing
  • health insurance
  • transportation

Andrew Goldman from Wealthsimple wrote, “One diligent blogger recently broke down the monthly expenses of a single person living (pretty well) in Toronto and came up with $3,341.44 per month, or $40,097.28 a year after tax. In order for this person to experience no lifestyle change for three to six months, she would need between $10,024 (3 months) and $20,048 (6 months) in her emergency fund.”

Where should you keep it?

Liquidity is the name of the game. Generally, you should keep it in a high-rate savings account, easy access GIC, or any ETF or mutual fund that has a high trading volume and a liquid composition. 

Your homegrown everyday savings account gives you little return on your money but is the safest.

Next would be a high-interest savings account. Once again, they are guaranteed safe, but you would need a minimum of $5000 to start getting interest from most institutions. There is some completion between banks in the area, so check it out.

Then comes GICs. A GIC is a Guaranteed Investment Certificate. You basically pledge to keep your money with the bank for a certain period of time, and in return, you receive a slightly higher interest rate. Naturally, the longer you commit for, the higher the interest rate paid. The interest rates could be fixed, variable, or increase over time. Just make sure that you have a redeemable GIC, which lets you take the GIC out early if needed — just read the fine print. Often if you have a non-redeemable GIC, you could either lose your interest and often pay a penalty.

ETFs can be a safe vehicle for your emergency fund but not guaranteed in any way. ETFs provide diversification, lower fees than mutual, and liquidity. Indexed fund ETFs are fairly safe; leveraged ETFs should be kept far away from your emergency fund.

Certain mutual funds can also be a good place to invest your money. Mutual funds are professionally managed funds that usually have good diversification. Generally, the money market funds, bond funds, balanced, and target-date funds.

Unless you really know what you are doing, the stock market is not a good place to keep your money. Volatility is not your friend.

Get started now to create or update your emergency fund. You never know when you will need it!

If you would like to talk and find out how I can help you, click here

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