Emergency Fund: Get One Now!

An examination of the importance of having an emergency fund and how to approach starting one.

Do you have an emergency fund? I do because I recognize how important it is from personal experience. When I was in university I supported myself by working part-time. I didn't have lots of surplus money, but I got by. Then something unexpected happened - I broke my ankle and I was unable to work for several months. I got a little bit of money on EI, but that wasn't enough to pay all my bills. Luckily, my parents and grandparents were able to help me out, but that experience has instilled in me the importance of having an emergency fund. Nobody plans on bad things happening to them, but it's best to be prepared if they do. The last thing you want to worry about when you're recovering from an illness, death in the family, or job loss, is stress about how you're going to pay your bills.

Why Should I Have An Emergency Fund?

If you were injured and unable to work tomorrow, what would you do? What if one of your family members took ill and you took a leave of absence to care for them? What if your spouse lost their job and you couldn't support your family on one income alone? These are all realistic scenarios that you should be prepared for. We always think nothing bad is going to happen to us (and hopefully nothing ever does), but wishful thinking isn't going stop those things from happening. If you have benefits from work they might help you out, but make sure that you understand exactly what conditions qualify you for assistance. You might be surprised to find out you're not as well covered as you thought.

Some people think that if you lose your job EI will cover your bills. This is not true. You'll only get around 55% of your average salary on EI, and that's after a 2 week waiting period during which time you can't earn any money (including vacation pay and severance). You also have to qualify for EI, which is determined by the reason for leaving your job and how many insurable hours you have banked. So even if you qualify for EI, you'll still need some savings to get you through the waiting period.

How Much Should I Have?

How much you should have set aside in an emergency fund varies depending on who you ask. According to RBC's website, you should have 3 months set aside. They also have a neat calculator on their site that lets you calculate how much you should have set aside according to that principal. Other experts say you should save between 6 and 12 months of your salary. Personally I have a goal of having 6 months of my salary set aside. I am nowhere near there right now, but the point is that I set aside money every month to help me reach that goal. 

Where Should I Keep My Emergency Fund?

You want your emergency fund to be somewhere safe where you can have quick access to it. This means not tying it up in investments. It can be hard to watch your fund sit idle, but when you do need it you want to get it right away. I store my emergency fund in a savings account at my bank. It's earning 1.35% in interest, with an anniversary bonus. This isn't much, but I did research and it was one of the highest interest rates I could find that suited my needs for this particular situation. Do your own research and figure out where you would feel most comfortable keeping it.

Don't Use It Until You Need To

Now, it can be tempting to use your emergency fund to pay for any little emergency that pops up - resist that urge! If you keep spending your emergency fund, it won't be there when you really need it. You should hopefully have other savings accounts for things like medical expenses, home repairs, and car repairs. Save the emergency fund for a genuine emergency!

Conclusion

It can seem impossible to set aside 3, 6, even 12 months of your salary for something that may never happen. But trust me, you should do this, and sooner rather than later. Even if you set aside a little bit every month it will help out. Saving is a habit you have to start. So once you get in the habit of setting aside say $20 a month, it will be easier to increase that later to $100, even $200. In no time at all you'll have the critical savings fund you need, just in case.