A recent poll found that less than a quarter of Canadians would not be able to handle an unexpected $2,000 expense and nearly half of all Canadians are living paycheque to paycheque. In other words, many Canadians would struggle if they were confronted with an emergency situation. Hopefully you’ll never need to use an emergency fund, but it’s still important to have the protection available for ourselves and loved ones.
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How Much Should Be in an Emergency Fund?
So how much is needed in an emergency fund? Typically, this amount should be about 3 to 6 months of living expenses. The exact amount depends on your situation, e.g. health, employability, etc., and of course, the more the better. This way, if you’re out of work you will have an extra safety net that can sustain you for several months.
Having an emergency fund will also provide you with an extra sense of security that can reduce some of life’s many stresses. You’ll now have the confidence of knowing that you will be partially sheltered from emergencies.
What Type of Account Should be Used For an Emergency Fund?
Funds should be in an account that can be quickly and easily accessed, like a general savings account. It’s important that you have access to these funds right when you need them. Many investments, for example GICs, will restrict the availability of your funds that may make them inaccessible in times of need.
Your emergency funds should also be in an account that has no risk of losing any of its value. Investments like mutual funds and EFTs regularly fluctuate in value and often decrease in value. It would be frustrating if you had an inadequate amount funds at a time of need.
Don’t Have Enough Savings?
Admittedly, it can be difficult to save an emergency fund. One trick is to slowly save every paycheque and use lump sums (ex. income tax refund or bonuses) as an extra boost. In the meantime, a low interest credit product can sparely be used as additional protection. The biggest problem with using credit products is that your future cashflow will be reduced by the debt’s repayment amount and you’ll end up paying an interest premium. To minimize these costs, a low-interest line of credit is the best option because it only charges interest when used and it typically has a lower interest rate than a standard loan or credit card.
This can be a gloomy subject, but having an emergency fund is important to any individual’s personal finance health. The good news is that you’ll avoid future stresses and have additional confidence when you protect yourself with an emergency fund.
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