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.
In my world an emergency fund replaces an income. Click To Tweet
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:
Having an emergency fund gives me peace of mind in case the worst happens. Click To Tweet 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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