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

How to save it, supplement it and where to keep it

Tannya McBride (Finance '07) knows that most people see an emergency fund as a nice-to-have stash of cash, rather than a financial necessity. When she worked as a certified financial planner, she did her best to change minds.

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

But pets get sick, houses suddenly need repairs, cars break down, jobs can be lost, she points out. 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

small pile of credit cards

“If you have credit card debt, pay that down first – that’s number one,” says McBride, mindful of the high interest rates and the burden of their compounding nature. Looking at a long repayment schedule? Start saving in your emergency fund modestly (see how below) and pick up the pace once your credit card debt is repaid.

Figure out the size of your fund

canadian dollar coins

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

If you have a stable job and are in good health, an emergency fund for three months of bare necessities might do, says McBride, so about $9,000. If you don’t, and aren’t, or if

  • your job is highly specialized and hard to replace
  • you have a high income and expenses to match
  • you’re responsible for several dependents, whether they’re children or aging parents
  • you live in an expensive city
  • there are other factors that give you pause

you may need as much as 12 months worth of expenses, says McBride. That is, $36,000.

Get saving

hand holding white travel mug

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

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

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

Supplement your fund

money bags drawn on chalk board

McBride suggests supporting or augmenting your fund with a line of credit, which has a lower interest rate than a credit card and flexible repayment options. If you need it, it's there.

She also strongly recommends pairing your emergency fund with disability insurance, which provides a monthly tax-free income if illness or an accident means you cannot work.

“If you have a job, you should always have disability insurance,” says McBride. Your abilty to make 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 need to sit in a savings account earning near-zero interest, says McBride.

Tax-free savings accounts are great vehicles to use for emergency funds, as long as you keep the money liquid.”

Liquid means immediate access despite the money being invested. McBride points to things like a cashable GIC or money market fund, which is a mutual fund that can be quickly made into ready money. Whatever you choose, make sure your principal is guaranteed. Holding the investments in a TFSA will keep the income from being taxed.

Be disciplined

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

“People have the right intention,” says McBride. “They start putting money away for an emergency fund. And then they spend it.”

It’s tough to commit to planning for the unforeseen, but your future self may thank you for it even as your present self may wrestle with temptation. Get comfortable with priorities you’d rather not think about.

“Buying a  gift for someone is not an emergency,” says McBride. “A trip because you’re stressed out? That’s not an emergency. You need to have the discipline not to spend that money – unless it’s an emergency.”

Banner image by Sezeryadigar/istockphoto.com

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