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Emergency Fund: Waste of Time or Peace of Mind?

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emergency fundDo you have an emergency fund?  I have been doing a lot of thinking about having an emergency fund and their purpose.  Why we might need one and some reasons people give for not having one.

What an Emergency Fund Means to Me:

Just like in my earlier post about budgets there are a lot of different meanings for the word emergency fund.  When I talk about an emergency fund I’m speaking about the money I set aside for huge issues like death, job loss or disability.

I have an older car and I know that I’m going to need to replace it.  So over the past several years we have been saving up money to replace it so when it does go it’s not an emergency.  It’s planned spending that I have been working towards.  Same thing if we need a new roof or the furnace goes.  We put money aside to keep the house running.

[bctt tweet=”In my world an emergency fund replaces an income.” username=”coupleofsense”]

Purpose of an Emergency Fund:

If you experience something as tragic as a job loss, death or disability there are tons of other things that you need to address or worry about.  For me I don’t want to worry how I’m going to pay my bills in the short term to be a part of that equation.  I want to be  able to take some time to settle and then figure out what to do. I don’t want to stress about money.

But What About a Line of Credit?

As you can imagine with 6 months worth of expenses sitting in a TFSA (for the non-Canadian readers it’s a savings account that any earnings are not taxed by the government) we get a lot of questions.

Multiple times it has been recommended to me to invest that money and then they try to sell me a line of credit to use in case of emergencies.  Since I’ve been a “loyal customer” they are able to offer the “best” rate.  By investing the money sitting in a savings account I can get a better return.

Right and Wrong at the Same Time:

Math wise yes it does make sense to invest that sum of money.  Even if it was put into a GIC it would likely make more than it is making now since interest rates are at historically low levels in Canada.  But my emergency fund is off limits to this type of thinking.  Where they are missing the point is that if you have to actually use the line of credit then you are increasing your debt at a point where it doesn’t really make much sense to do so.

If you were to lose your job let’s say and it takes you 12 months to find a new one do you think the bank is going to be cool with you not paying any interest on your line of credit since you have no income coming in?  Likely not.  So how do you use the money and then pay the interest on the money you have used if you have no cash reserves?

No really, I’m asking because I have no idea why that makes sense as a plan and this is one of the main parts that many bank advisors fail to explain to clients when proposing this plan.

But What About Life Insurance?

As part of a well rounded financial plan you should have some type of life insurance.  I’m not going to spend time discussing what you should or shouldn’t get (term, whole life, etc.) as that is very dependent on your specific financial situation.  Life insurance is there to cover you if there is a death however  the money wouldn’t necessarily come in right away.  Emergency fund is cash in hand available at a time when you have enough things to worry about.

Emergency Fund = Peace of Mind:

[bctt tweet=”Having an emergency fund gives me peace of mind in case the worst happens.” username=”coupleofsense”] It is the last possible resort and I hope that I never have to use it.  It’s not about getting the highest return or producing income.  It’s like a blanket that I can pull out of the linen closet when things get cold.  So I will politely decline any suggestions to invest the money to help “earn me more”.  I’m earning just fine, thanks.

What you think about having an emergency fund?  Is it a waste of time or piece of mind?

“By failing to prepare you are preparing to fail” Benjamin Franklin

Take Care – Sarah

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  1. ARBM says:

    Emergency funds are pretty controversial in the personal finance world, eh? I agree with you that you need an emergency fund to be pretty accessible in order to really be of any use, but I am pretty strong in the opinion that money in a TFSA should be making as much tax-free income as possible. (This coming from someone whose TFSA is sadly low in funds… )

    I consider my TFSA to be retirement money, so it is invested in some mutual funds… However, if I were in dire need of the money in an emergency, I would totally sell the funds and withdraw the money. But you do have a point that doing that will take some time… What do to in the meantime? I would say that a line of credit isn’t a bad temporary source if you can just pay it off with the money you are getting from selling your investments… The likelihood of making more from the investment than the interest that will be charged for the time it takes to get the money is pretty high I think… Well, hopefully because hopefully you won’t need the money for a long long time (if ever).

    But again, take all this with a grain of salt… I still don’t have a fully funded emergency fund myself… and the portion of it that I have funded right now is sitting in a regular savings account… So, I’m not exactly following my own advice…

    • Couple of Sense says:

      Thanks for the perspective. Based on my income and the fact that I don’t have a pension it makes more sense to contribute to an RRSP for my retirement. Currently I still have catch up room so I focus on contributing to that. That being said there is a huge amount of room in my TFSA since it has been around since 2009 so in theory I could use it for both purposes.
      Just to play devil’s advocate to your point if you had an emergency this past week after the market tanked due to the Brexit you might be down considerably and the interest at say 6% on a line of credit might actually be higher if you were forced to sell low. You could wait until the market was up but truthfully that is difficult to time.

  2. IH says:

    Emergency funds and the amount in them is different for everyone. For me, I like the comfort of knowing I have a sizable amount of money in cash. This comfort allows me to be in an investing mindset with the rest of my money. It’s not for everyone, but for me, I need a large emergency fund.

    • Couple of Sense says:

      That is a really good point. I would probably want to have a larger emergency fund if I my income was more variable or if I was self-employed. And there is a sense of freedom knowing that you can invest the rest of your money when you have you basic foundation covered.

  3. Kaytie says:

    I’m not Canadian, but I have the same discussion around letting an emergency fund sit in “cash” so it’s available, or investing it and making it less accessible. Ultimately, one of the motivating factors behind getting money under control is to have peace of mind that you will never miss a bill, so having a generous emergency fund, even if it’s in cash, would be the primary goal for me!

    • Couple of Sense says:

      Agree. Just recently we were at the bank and they asked us if we wanted to move the money into a GIC (which I think is a CD for you) and when we said no and they gave us a hard time. But having to sell something in case of a true emergency is not something I want to deal with. Cash is best when dealing with emergencies since it is one less thing to think about.

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