What to do if you don’t have an emergency fund

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How to keep it, how to complete it and where to keep it

Tannya McBride (Finance ’07) knows that most people see an emergency fund as a nice stash of cash rather than a financial necessity. When she worked as a Certified Financial Planner, she did her best to change mindsets.

“Most people don’t have an emergency fund,” says the JR Shaw School of Business instructor. “I had to have constant conversations with customers. They never saw it as a need, because they never had an emergency.

Today, McBride believes that need may be clearer, given the urgency of the years-long COVID-19 pandemic that, at worst, has pushed unemployment in Alberta to a low. unprecedented 15.2%.

Losing a job is just one of the scenarios requiring an emergency fund, she adds. Pets get sick; houses suddenly need repairs; cars break down – you never know what will define an emergency until it happens. But that doesn’t mean you can’t be ready for it.

Pay your debts first

“If you have credit card debt, pay it off first — that’s the first thing,” says McBride, aware of high interest rates and the burden of their aggravating nature. Are you considering a long repayment schedule? Start saving small (see how below) and pick up the pace once your credit card debt is paid off.

Determine the size of your fund

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It depends on a variety of life circumstances, but it’s based on the sum of your basic expenses, McBride says: housing (mortgage or rent), food, clothing, insurance premiums and transportation. Say it’s $3,000. Multiply that by the number of months you may need to cover.

If you have a steady job and are in good health, an emergency fund for three months of bare necessities might be enough, McBride says, or about $9,000. If you don’t, and you’re not, or if

  • your work is highly specialized and difficult to replace
  • you have high income and expenses to match
  • you are responsible for several dependents, whether they are children or elderly parents
  • you live in an expensive city
  • there are other factors that make you think

you may have up to 12 months of expenses, says McBride. That is $36,000.

Save

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What is the difference between these basic expenses and your total cash flow each month? Somewhere in there is money you didn’t know you had that you can divert to your emergency fund, McBride says.

“A lot of people are shocked when they see how they spend their money. They don’t notice they’re spending $200 a month at Starbucks, for example.

Consider turning the short-term gratification that comes from a fancy espresso drink into long-term peace of mind.

Complete your checkout

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McBride suggests supporting or increasing your fund with a line of credit, which has a lower interest rate than a credit card and flexible repayment options.

She also strongly recommends pairing your emergency fund with disability insurance, which provides tax-free monthly income if an illness or accident prevents you from working.

“If you have a job, you should always have disability insurance,” McBride says. Your ability to earn money, she adds, is your most important asset.

Put it to work before you need it

plants growing on stacks of coins

Your fund doesn’t have to sit in a savings account earning close to zero interest, McBride says.

“Tax-Free Savings Accounts are great vehicles to use for emergency funds, as long as you keep the cash on hand.”

Cash means immediate access despite the money invested. McBride points to things like a cashable GIC or a money market fund, which is a mutual fund that can be quickly turned into cash. Whatever you choose, make sure your capital is guaranteed. Holding the investments in a TFSA will avoid the income being taxed.

Be disciplined

piggy bank wearing a helmet and about to be hit by a hammer

“People have the right intention,” McBride says. “They are starting to put money aside for an emergency fund. And then they spend it.

It’s hard to commit to planning for the unexpected, but your future self can thank you for it, even if your current self can fight the temptation. Get comfortable with the priorities you’d rather not think about.

“A gift for someone is not an emergency,” McBride says. “A trip because you’re stressed?” It’s not an emergency. You must have the discipline not to spend this money unless it is an emergency.

Banner image by Sezeryadigar/istockphoto.com

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