Why You Need an Emergency Fund & How Much You Should Set Aside

One of the most overlooked things in personal finance I see from young professionals is the emergency fund. In one of my first videos, I’ve talked about the things you need to look at before deciding what to invest in. Unfortunately, emergency funds aren’t exciting, so instead people want to focus on other things like buying a house and investing in the stock market.

According to a study by Forum Research, 46% of Canadians polled had less than two months of emergency savings available (26% had none). When you look at the millennial crowd, ages 18 to 34, 59% have less than 2 months available, 35% had none. We all hear the stories about how millennial’s’ have precarious work, which explains why emergency funds might be hard to save up for, but that reality is one of the main reasons why emergency funds are so important.

In today’s post, I’ll be talking about why you need an emergency fund and how to calculate the amount you should save.

There are many reasons why an emergency fund might be needed.

As I alluded to, the main reason is to cover expenses if you lost your job and income stopped flowing in. If you own a house, major maintenance might need to be covered like replacing a furnace or repairing a broken pipe and its associated damages. Perhaps your car breaks down and you need to get it fixed so you can continue to get to work, or your pet gets sick, or you don’t have benefits and need to cover additional health care expenses. Or maybe one of your family members lives halfway across the country and you’d have to cover an unexpected flight to visit them in an emergency.

Convinced you should have an emergency fund yet? So how much extra cash should you have available? The common response is 3 to 6 months. Is this 3 to 6 months income or expenses? Ideally, you’d want 6 months’ worth of income or more available in your emergency fund (while achieving all your other goals). For cash strapped millennials with many competing goals, I’d go with expenses, and once you have some additional leeway in your cash flow, consider bumping it up to gross income.

Now, 3 to 6 months is a pretty broad range, so which one should you aim for? Remember those emergencies I listed before? Well it will all depend on how relevant those emergencies are to you. I’ll outline a few of the major ones today to give you a sense of how they might affect how much you should keep in your emergency fund.

Your job stability. If you have very high job stability, like a tenured professor, you will likely need less in your emergency fund since it’s unlikely that you’ll have to cover expenses while you’re looking for a new job. If you think you could be let go at any time or if you were it would take a while to find a new job, keep more cash available. It’s important to consider how difficult it might be to find a job in a depressed economy, not when all is going well.

Do you own your house? If you’re renting, major repairs will be covered by your landlord, so you shouldn’t have to cover those yourself. If you own your home, furnace repairs, roof replacements, and damage are all your responsibility.

Car ownership. Owning a car has many costs associated with it, including maintenance and major repairs. Maintenance should be budgeted for, but things happen unexpectedly. When I got in my car accident, there were immediate costs I needed to cover, and transportation costs added up while I took the time to look for my perfect car.

Pet ownership. Pet bills can add up quickly, so if you own a pet, make sure those can be covered outside of a credit card with a larger emergency fund.

Location of Family Members and Close Friends. I have family out in Halifax, and I’d want to be able to visit at a moment’s notice in an emergency, no matter what the cost of a last-minute plane ticket was. My emergency fund should be bigger than the same person with family close by in Waterloo.

Health Benefits and the Coverage. Many employers offer health benefits, but some don’t or are not as comprehensive. If you’re self-employed, you might purchase health insurance yourself, or self-insure. Make sure your coverage would be able to cover an emergency. If not, you can purchase additional health insurance, or self-insure through a larger emergency fund.

Finally, Personal Preferences. Some people are only comfortable knowing they have a large cushion to fall back on if a single or multiple emergencies occurred at the same time. Having a larger emergency fund provides peace of mind.

There are a lot of factors that will go into determining how much you should aim to have in your emergency fund. Once that’s determined, the next step is to figure out where to actually put that money. That’ll be my topic for next time, so be sure to subscribe to my channel so you don’t miss it in two weeks. You can also follow me on LinkedIn to keep in touch.

Have you ever needed an emergency fund? Tell me about what you learned in the comments below!

Source:

http://poll.forumresearch.com/post/2784/interest-rates-september-2017