It’s An Emergency!
Posted by Gail | Filed under When Ca-Ca Happens
Now that the economy has gone to hell in a hand-basket and people are losing their jobs left, right and centre, it seems that the whole idea of an emergency fund has come full term and is ready to be born into people’s reality. Wow! I’ve been preaching the importance of an emergency fund and 25 years later I’m in style.
An emergency fund is a key component of any sound financial plan. The huge barrier for most people is how intimidating the process of saving up six months’ worth of essential expenses has been. Six months’ worth? In a savings account? OMG!
I’ve been battling The Easy Way Out solution most financial institutions offer: the line of credit emergency fund. Bah! How is going into debt on a line of credit during an emergency a sensible solution? It’s not. It’s the excuse people use for not saving! Plain and simple, it’s the lazy man’s solution. And it’s expensive, soul stealing and bad planning (or would that be “no planning?”)
People who don’t see the point in having an emergency fund are either really, really short-sighted, or completely unwilling to stop spending all their money. They are so averse to taking a little bit of what they are blowing on crap and setting it aside that they’re willing to brave the terrors of an emergency (and it’s only a matter of time) without any kind of safety net.
How good would it feel to not have to panic when the car breaks down and you need to come up with an unpredictable $2400? How much safer would you feel if your baby, your mom, your partner gets sick and you must take time off work (without pay) to see to their needs? How much smarter would you feel if you got laid off from work and had enough money set aside to keep a roof over your head and food in your belly until you could get another job?
An emergency fund is CASH you’ve accumulated so that you can you have the money you need to keep things in balance when the crap hits the fan. Most of the time, it just sits there earning a pittance in interest, waiting to be called into active duty when The Worst happens.
Some people have a problem with the concept of the money just sitting there. Once they’ve built up a couple of thousand dollars, they start thinking of that money as spendable. The vacation becomes a “sanity emergency.” The replacement windows become a “home emergency.” They run up their credit cards and that becomes a “debt emergency.” They find a way to rationalize spending the money because the idea of having that money sitting there is so foreign to them.
People, anything you can predict having to spend money on should be a line item on your budget and become a planned spending category. Vacations, new windows and whatever you blew money on your credit card to buy are all predicable expenses. Even on-going vehicle maintenance is a predictable expense. It only becomes an emergency when the cost exceeds what you’ve managed to accumulate.
When you add up what it costs to keep your family going for six months, you might be intimidated by the amount you have to accumulate in your emergency fund. Six months of essential emergency expenses can be an enormous goal. So start small. Make your initial goal $500. Once you reach that benchmark, set your next goal.
Make your savings automatic. If you decide to save $100 a month, have that amount auto-debited from your main banking account to your high interest savings account every month. You’ll get used to living without that money in no time flat.
Gail, where am I going to find $100 a month? You might be surprised if you just put a little thought into it. If you’ve got car and home insurance, combining the two with the same insurance company could save you up to 20% on your policy. Better yet, shop your policies around to see if another company is prepared to give you a better deal.
Cut $25 a week out of your grocery budget, do some meal planning, shop with a list, and watch your emergency fund grow instead of your thighs.
Swap eating out for a fancy dinner at home and you’ll not only save money, you’ll learn to be a better cook. Invite friends for a pot-luck, and watch the evening turn into a night of laughter and games.
Combine your errands, car-pool with a co-worker, or hop on your bike and bank what you save for an emergency.
Go over your monthly auto deductions and see what you can trim or eliminate completely. Do you really watch that much TV that you’re willing to drop $100 a month on satellite or cable? Cut it in half and you’re half-way home to monthly emergency fund amount. Ditto your cell phone, long-distance bill, gym membership, and anything else you buy routinely that you’re now taking for granted.
The key is to actually save whatever it is you’re “saving.” Leaving it where you can spend it on coffee or a new sweater is self-defeating. Moving it somewhere you can’t touch it means it’ll be there when you REALLY need it.
May 7, 2009 at 6:46 am
Timely post as always Gail. I was adding up the balances of my savings (without the slow growing TFSA added in) and realized I’d have enough to pay off 1 of my 2 cc’s I still owe money on. And then I read a post from yesterday about wiping out the cc debt with emergency savings, so decided to sit on it. Then this post this morning confirmed that slow and steady will win the race, so I’ll pay it off next month as originally planned, leaving my EF intact. It’s not huge yet, but I direct deposit the day after I pay myself into 2 EF accounts, one actually being planned spending, but it makes me feel better calling it EF as it keeps me from going on a shopping spree while I still have a bit more debt to pay off. If I want to be debt free by end of Summer/early Fall, I’ve got to stay the course, and so far the course feels awesome.
As a side note, I’ve learned that I can’t be trusted with buying groceries on my PC card to pay it off the following month. Last month groceries also entailed birthday gifts for my daughter, a couple of lunches out where interac wasn’t available (it’s 2009 people, please!). The bill shocked the bejeebus out of me, so this month it’s cash or debit only (debit when I know exactly how much is in my account in order to stay out of O/D this month). Maybe once I’m debt-free I can be trusted to gain grocery store points again!
May 7, 2009 at 6:48 am
Of all the advice Gail has given us, this is the best. Life has a way of throwing you a curve ball when you least expect it.
Just as I had brought all my consumer debt down to zero and was working on my mortgage, I was diagnosed with Cancer. Fortunately, my prognosis is great.
However, had I not built in an emergency savings component to my budget, I’d be up the creek without a paddle. The fund wasn’t as much as I would have liked but anything is better than nothing. Along with my disability benefits from work there is a chance I can stay out of debt while I’m home.
By the way, don’t ignore Gail’s suggestion for disability insurance (even if you’re young and think you won’t need it). Do you really want to deal with injury/illness and a money crunch at the same time?
Thanks Gail!
May 7, 2009 at 6:55 am
Michelle: May I offer a suggestion for the points? I have a credit card I use as a cash card. Every week I make a payment on my card equal to the amount I have budgeted for gas and groceries. I make the payment BEFORE I go shopping. In this way I take advantage of the cashback on my credit card without worrying about a large bill at the end of the month. Of course this only works if the bank isn’t going to charge you for the extra transacrtions. Just a thought.
May 7, 2009 at 7:26 am
Michelle, I too like to use a points card…travel points for me…my husband and I both use the card for “life” and groceries…every pay day that portion of our budget is transferred to the card…ergo, not a penny in interest is paid and those points climb…one other thing to keep in mind…keep the limit on that card low so you simply can’t go over your budget amount…
Also, once again, in defense of the banker, I never recommend a line of credit as an emergency fund…I actually recommend a savings account
for emergencies…I also recommend a planned spending account…lines of credits have their place and can be a good product but not as a source of funds to pay for your day to day bills or that shiny pair of shoes:)
May 7, 2009 at 7:43 am
I have learned that the biggest obstacle to financial success is your own mindset: are you a spender or a saver? A spender is not necessarily a person who has lots of debt. A spender is also the person who hasn’t any debt and pays extra on her mortgage or pours extra money into her investments but hasn’t got a cushion, ie, emergency fund, for the unexpected. A spender is the person who believes that he is doing well by paying everything off quickly by paying more but doesn’t realize that they are living on the financial edge doing so.
Here is what we did. We started by saving $25 a week. I set up an automatic transfer of $25 a week from our chequing to our savings. And guess what? We didn’t even notice it. I then increased it to $50 a week. Didn’t notice it. Are you seeing where I am going? By now I liked the idea of saving so I started looking at how we could cut back on our expenses. Up to $100 no problem. Long story short. We are now up to $200 a week and don’t miss it. And surprise, surprise….we had an emergency that we had to dip into it. I hated the idea that we had to do it, but then I had to remind myself that that was what it was for and was grateful that we had it.
Starting small works. It’s all about changing your mindset and working toward paying yourself first. Just do it!
May 7, 2009 at 7:43 am
Gail, you’ll never go out of style…great post.
I’ve been squirreling away 10-20% since I was 17 yrs old and had my first job. I rarely touch this money but have had to in recent years. I purchased my condo with a great deal of the money saved. I continue to put money away and now my current savings (high-interest PC acct) has a little over $50K in it.
This is made up of a group of things:
Vacations – $5k –
Property tax savings – $2K
Home/furniture purchases – $10K
My *whatever I want* money – $3K
EMERGENCY (if I lose my job) – $30K
Of the money I transfer to this account every two weeks,
40% goes for EMERGENCY
30% to Home/Furniture
10% each to Vacations, Property Tax and whatever money.
Once you start putting it away, you don’t miss it. Actually, I love seeing this account grow…and not love it so much when it goes down. But I know for a single person, I’m ok at this point. If I were to have had a family, perhaps my situation would be abit different (save for different things).
I have RRSP deductions on my paycheque so I’m also saving that way. I figure I’ll be mortgage free in 3 years and well, maybe I’ll buy a bigger place. Who knows?….
Thanks for being such great teacher Gail…I hope to meet you one day.
Take care.
May 7, 2009 at 8:53 am
I was laid off Tuesday and I have a 2-month EF saved. I was aiming for a 12-month one, being single and only one income, but at least is something. Hopefully, I’ll get something from my company (I’m still working until the end of the month) and will be able to get by until I find another job.
It’s very depressing to be in this situation and it really changed the way I think about money… as soon as I find a job, my only goal will be to have a 12-month EF saved, I don’t want to through this ever again!
If only I had found Gail before…
May 7, 2009 at 9:12 am
Actually, the “expensive, soul stealing” way is credit cards.
A line of credit is not a bad compromise during the time it takes to build up the emergency fund. As long as you see it as only temporary and don’t actually use the line of credit. Get it *before* you lose your job, since you likely won’t qualify once you are unemployed.
May 7, 2009 at 9:15 am
Our emergency fund actually started as a result of a heating healthy plan I started in 2008. I stopped eating out for lunch every day because I learned just how much sodium and fat was actually in that fairly healthy looking tuna salad wrap I’d have along with the sugar loaded fruit drink. I hate bringing my lunch but as I started doing it, the savings on gas and take out was averaging about $35 to $40 per week! Before being converted by Gail, I would have taken that money and spent it on stuff, now it goes into a savings account each week and we don’t miss it at all. The best part! I’m down 17 pounds and two full dress sizes. So every once in awhile I treat myself to something new because shorts and Ts from two summers ago just don’t fit but at least I have the cash to do it and a savings account. Start small and as others said you won’t even notice it.
May 7, 2009 at 9:28 am
I am newer along this journey of THINKING about money *kickss herself* so my savings are smaller right now. I have my xmas money tucked away for dec 09, I have $1000 as a small EF tucked away and I am working towards savings up $2500 as a downpayment for when I buy my next vehicle. I have made such progress. If only I had started this even five years ago. sigh. but at least I’m starting it.
May 7, 2009 at 9:52 am
Congrats to Diane for losing weight AND saving money, you must have a lot of self-control.
Jolie, I wish I had started sooner, too, but I am a late convert to saving to save (as opposed to saving to spend!).
I think what cannot be emphasized enough is the RELIEF that comes with knowing how much is in the bank. Until I started using cash for everything (not my debit card) I had to check at the ATM to know what was available and sometimes it was a shock, because of course I couldn’t remember all the little purchases.
Having money in the bank is such an anxiety reducer, even if you don’t think you are worried about money. You never have to think, when will this cheque come out?, or do I have enough in the account while you are actually purchasing something.
It is empowering.
And for women, if your spouse dies you may need some money saved in your own name until all the estate and paperwork is sorted out. Accounts may not automatically be accessible to you, even if it was your husband’s money. Can you imagine being widowed AND not having any money for several months?
I am envious of the serious savers who write in. I still struggle with saving and not planning what I can spend the money on.
I am needing to organize my accounts to separate planned spending from my EF. But, I am leaving next week for London and Paris and have all cash to take, so no post-vacation surprises on a credit card. yipee to planned spending!!!
ps. my husband is regretting that I became hooked on Gail. I can’t mention it for a while now. I guess I am like a reformed smoker!!
May 7, 2009 at 9:54 am
I am most definitely one of those people who used to thing an emergency fund wasn’t necessary, as I had an LOC and credit card with thousands of dollars in available credit. Of course I used them both for to buy stuff and never could get the LOC down below $15K.
In February I started using the jars and Gail’s budget. Our mortgage renewed in March so I paid off the LOC at that time and my credit card is now in the freezer.
I am amazed that in just over 2 months, by using the jars and not buying stuff, that I have managed to save over $6,000 in my new emergency fund! That’s three month’s expenses already. If I had known how good it would feel to watch that account grow with every paycheque I would have done this a long time ago!
May 7, 2009 at 9:59 am
I admit I’m one of the ‘LOC-as-an-EF’ people. I don’t have a problem saving money, we put away about 30% of our income to TFSA, RRSP, etc, but I just hate the thought of a low interest account sitting there with 50k. We have a secured LOC on our home where we have a lot of equity and I figured we could use the LOC in an emergency, and if the emergency drew on we could refi the mortgage. We have greatly accelerated our mortgage so I kind of consider that also part of our ‘EF’. Someone convince me otherwise! Age 35 both myself & husband, and two small kids.
May 7, 2009 at 10:29 am
We’re still in the process of saving our EF, but we still started it a long time ago with just a tiny bit from each cheque. It was only a few hundred dollars, but boy did it come in handy when the cat had to go to the emergency vet. Same thing happened a few months later with the other cat. Each time I was thankful for the little bit we did have saved, plus it has spurred me on to increasing the amount I contribute from each pay cheque. After DH gets back from school and (hopefully) gets his pay raise, we will be putting half of that raise to the LOC, and the other half straight to EF. As tempting as it is to put it all to the LOC, I’ve realized the importance of having backup. Such a sense of relief.
May 7, 2009 at 10:38 am
I currently put away $100/month into my emergency fund ($50/bi-weekly). So far the fund is juuust under $1000, which is about $200 short of my bare bones budget.
It can sometimes be a challange to not dip in to it to help pay off my credit card (I recently had some unexpected car expenses) but at this point I am very determined to save at least 3 months living expenses.
So rather, I will have to look at my budget to carve out more debt repayment money from somewhere else.
It’s a chanllange to build up this seperate ‘funds’ or ‘accounts’ – pools of money. but it is worth it, 100%.
May 7, 2009 at 10:44 am
because of gail we started saving money towards an EF. i’ve said this before but it bears repeating.
we started with $10 a week. that money got automatically transfer to our savings account. i thought it would be missed as our budget was quite tight at the time. but we didn’t. over the weeks we upped it to $12, then $15, then $18…and on. now we have $21 a week transferred into our EF. i’m even thinking of upping that amount to $22 a week, because really, what is another $1 a week? the amount in our EF is still small but it is nice knowing the money is there.
about 2 months after we started saving for the EF our car had a flat tire. in the past that would have meant scrambling and worry and probably a utility bill would not have been paid in full or we would have charged it to our cc. but, because we had our small EF we were able to take the money out of there for the new tire. it was wonderful being able to draw on that money for an unexpected expense.
the more that i have learned to enjoy saving and planning our spending the more i have realized that not only do we need to save for an EF but we also need to save for holidays (obviously), for car maintenance/repair, house maintenance/repair, and christmas among other things. i’m a firm believer in baby steps and we have started saving for those things in small amounts.
i have everything automatically transferred into our savings account and i made a simple excel spreadsheet and i track the different categories that way. i have been doing that for 2 months now and i find it very satisfying to allocate the monies into the different categories.
thanks again for a great post gail!
May 7, 2009 at 10:56 am
We have a “sort-of” EFund set up, and boy did it come in handy a few months ago!
Hubby took me down south for our anniversary, and when we got there, we discovered that the hotel was a total dive, complete with broken glass, mangy dogs, the whole nine yards. We picked up our stuff and starting walking… trying to find any hotel that would take us (not easy in that particular location).
It was wonderful to be able to FINALLY find a place to hang our hats (almost everything was sold out), and while it cost us a fortune, we a) already had the money put away, so we could concentrate on enjoying our trip, and b) the new place wound up being SPECTACULAR.
It was such a relief not to have to spend our vacation worrying about a looming credit card bill!
May 7, 2009 at 11:05 am
amen! we struggle sometimes to put away as much in our EF as we should, right now we only have 1.5 months in the bank due to us cutting back on savings due to mat leave, but we have our budget in place for when i get back to work in July to start beefing it up again. having savings has saved our ass time and time again and it’s nice to know that if something comes up it won’t go on a cc. i like posts like this because it gets me motivated and helps me refocus on what is really important and what we need to do to secure a sound financial future for our young family.
autodeductions are definitely the way to go, we have a ING account for our EF, for Christmas and for ‘household’ and ‘baby’. it helps me to have them all separate and separate amounts going into them than just having ‘one big pot’.
May 7, 2009 at 11:49 am
I came across TDDUP about a year ago, and started using Gail’s budget tools and the jars, building an EF, and paying down debt. A few months later, we actually took on more debt in an LOC after a lot of thought and conversation. We were at also hit with increased strata fees for repiping our building. Since then we’ve been actively paying down that LOC while building our EF and a vacation fund.
I’m glad we had the LOC at our disposal, but I wish — like others have mentioned — that we’d started building savings earlier so that we didn’t have to take on more debt. Now it seems to me that the logic of seeing an LOC as an EF is pretty skewed. If I think it’s 6 months’ expenses equals an impossible sum to save, how am I going to pay back that amount on an LOC if I needed to use it? I might be getting a pitiful amount on my EF in a high-interest savings account (and isn’t that term a joke right now), but I’m paying twice as high a rate on my LOC….
May 7, 2009 at 12:10 pm
Jane:
a LOC is NOT an EF:
1- the bank can decide to reduce your LOC or cancel it as it wishes
2- the bank can decide to change the interest charge as it wishes
3- a LOC is money you DID NOT EARN yet (you may not spend money unless it is earned according to the rules of a balanced budget)
4- there is a financial obligation to repay a minimum amount (budget implications)
an EF:
1- it is your money so you can access it in a reasonable amount of time
2- the amount of money in it is determine by YOU (not the bank)
3- it is money you have already EARNED (not money you hope to earn in the future; read Agatha’s post)
I did find a good use for a LOC:
clearing a check without having to wait for 5-7 days!
My use of the EF:
- vet bills, vet bills, vet bills
- trip for a funeral (flight)
- last minute change to a flight during a holiday for an emergency
I started a car fix fund. If it does not get used, it will be a good down when I change car.
May 7, 2009 at 12:14 pm
Liz – that’s exactly what I was thinking! If someone thinks they can’t save 6 months or even 3 months in an emergency fund how in the world are they going to pay off that amount on their LOC if they ever have to use it.
May 7, 2009 at 12:15 pm
If forgot:
Other ways to fill up you EF:
1- tax return
2- if you stop contributing to CPP and EI in the fall
3- money gifts
4- unexpected refunds
5- second job
6- net pay increases
May 7, 2009 at 12:21 pm
Agatha – I am thinking of you.
You will get through this! I am lucky in that when I was laid off a year and a half ago I had been unhappy with my job and looking for a new one anyway. It really eneded up being an opportunity to work full time at finding somewhere I wanted to be for work.
Be confident and positive and treat yourself well as you move through this.
I post on Lori’s Online Gail Club – you’re welcome to send me a msg via the forum if you would like more info on my personal experience or a set of eyes to read over your resume/cover letters.
May 7, 2009 at 12:49 pm
The other option to saving a bit of money is taking your car off the road for a few months when you know you don’t need it so much. For instance, taking one of two cars off the road in winter means only one set of snow tires needs to get installed. Saves big time on insurance if you are only insuring one car vs two. Keep in mind if you live in a strata situation that any uninsured car parked in a common area parking garage must have special storage insurance of its own.
May 7, 2009 at 12:51 pm
I recently asked my bank to get rid of my business line of credit (I freelance). I originally set it up thinking I’d need it in the event that I got a big contract that would see me making payments out of pocket before receiving payment but that hasn’t been the case at all. If a client’s work requires massive out of pocket up front, I get them to pay it directly with the supplier. I also get 50% up front. I have effectively worked up a process where I have no need for a line of credit and quite frankly, all this talk of people using LOC as Emerg Fund freaks me out. I’d rather not have the option.
I closed it. I don’t feel any less secure. In fact, I feel happier having done it!
May 7, 2009 at 1:13 pm
Another great post, and comments. Re: saving $6K in two months – wow, that is $2K more than I make in two months!! But, different strokes… My biweekly pay goes directly into my savings account with PC. I have to plan my spending, because it takes 24 hours to transfer between accounts. By the time the next pay day comes around, I transfer any ‘left overs’ to my TFSA, like emptying your change into a jar at the end of the day/week. I am finally of the mindset that the cashback on my gas purchases goes into savings, instead of into the grocery fund. I am TRYING to realize that anything saved while shopping does NOT get re-incorporated into the spending budget. Building up that savings account will take a while, but is so necessary. We never know when an emergency will pop up – a co-worker discovered her headaches were actually a brain tumor! We have been fundraising at work for the past two weeks to help her family out, while she has been hospitalized and just had surgery. That is one thing about Canadians, we are always willing to lend a hand, find a way to contribute to a worthy cause. I love the ideas, comments, suggestions, and general all-around attaboys one gets from this site. Does a body good…
May 7, 2009 at 1:13 pm
@Jane: You’ve already gotten good advice about the risks of LoCs. And a mortgage, and refinancing, is NOT an emergency fund. I think that drawing from home equity is as horrible as drawing from your retirement funds. You’re eating your seed corn.
If the prospect of low interest is keeping you from building up an emergency fund, stop portraying it to yourself as 50K in a low interest account, but as various amounts of money, earning varying amounts of interest, while still offering you high security.
1) Put at least 3 months of emergency expenses in a high interest account at ING or another online bank. My account was 3% last year, but 1.5% now. Not terrific, but not nothing, either. And as the economy improves, savings interest will go up again.
2) Put the rest in GICs. If they come to term, you earn the posted rate, but many institutions will let you cash in early and will still give you some nominal interest. For example, at ING right now, the 5 year GIC earns 3%, and if you withdraw early, you still get 1%. If you put $50,000 in there and didn’t touch it for 5 years, you’ll have earned almost $8,000 in interest. If you withdraw it after 2 years for an emergency, you’ll have about $1000 in interest, which is nothing to sneeze at.
You can also try “laddering”: have some money in a high interest savings account, some in a 1 or 2 year GIC, and some in a 5 year GIC. In a year or two, the short term GICs can be put back into GICs again, probably at a higher interest rate than today.
May 7, 2009 at 1:13 pm
Agatha, hang in there!
This just happened to my best friend and it has put the fear of god (or, rather, Gail) in me. She’s had a world of trouble with unemployment and her severance check from her company. On top of that she only has a one month EF. I think cashing out a 401k will add another month but the tax bill isn’t gonna be pretty.
It’s also put the fear of mortgage in me. She owns a condo and, in this market, has pretty much zero hope of selling so zero flexibility. No mortgage without a minimum of 12 months of payments in the bank and 20% down for this single girl.
May 7, 2009 at 1:31 pm
Hey, Michelle way up there at the top!
Another idea is when I do use the credit card for the points/cash, I take that receipt home and deduct the amount I have spent from the budget line it belongs in, just as if I had spent cash. That way you know how much is left in the budget, and don’t “forget” about the $20 here and $40 there that was spent on the card.
May 7, 2009 at 2:31 pm
Thanks for the advice all. I think the best way for me to use it is to upload some cash to it first, then I have a buffer. If I forget about the $20 or $40 here or there, the buffer will cover it. It’s kinda backwards giving THEM my money to hang onto for the month, but I do like the free groceries or aeroplan miles I get from both cards. One is easy to pay off every month as it’s only gas, oil changes, etc, so is generally less than $300/month. The grocery one was easy until April, so May is spent catching up and cutting expenses so I can build a little extra $400 or so in a fund to deposit and leave on the card while auto-transferring from bank to card when I do make grocery purchases from now on.
Excellent suggestions, as always!
May 7, 2009 at 2:40 pm
Amen Gail!
We have to creep before we can walk. Still plugging away here!
May 7, 2009 at 3:14 pm
The problem is that one term “Emergency Fund” is covering both short term time sensitive emergencies and longer term needs for savings.
I have $2000 in a fully liquid, non sheltered savings account at the same bank as my checking account for quick transfers. That is my “emergency fund”. If something incredibly time sensitive hit and my regular savings were locked up in GIC’s/investments, then I have a line of credit to cover the difference for the short term between needing the money and being able to access my savings without penalty.
I also have regular savings, which I am moving into the TFSA as we can, which are mostly GIC’s, although I have some bonds and ETF’s as well. These are all fairly liquid savings, and this is what I would tap over time if I lost my job. And then, of course, if we drained the TFSA, we could tap the RRSP’s.
From the looks of it, both Jane and I are SAVING the same amount as emergency fund proponents, we’re just of the belief that all of the funds don’t need to be accessible at a moment’s notice, since the cost to do so can be significant. For example, someone having $20,000 in a PC financial savings account who pays 25% taxes would earn $150 in interest after taxes at today’s rate of 1%. Someone who had $2000 in that account and $18000 in a 2 year GIC at today’s rate of 1.9% would earn $357. Take that $207 difference over 45 years and you’re talking over $9000. If rates go up the tax free nature of the TFSA will make that even more drastic… if we were talking 5% and 5.9% the difference would be $387 per year. (And yes, my example only works in 2010 when a couple could have $18,000 in the TFSA, this year we’re capped at $10k).
May 7, 2009 at 3:20 pm
I decided to freeze one of my debit cards as I use it strictly for fixed expenses and my one and only credit card. I put them in my fridge-freezer on the main floor…..I had to move the cards to my basement freezer because I thawed it out and used the cc. I have decided to simplify my life (thereby cutting costs) and so I am clearing out the basement freezer because I don’t need to store all that food as I live on my own. No, what am I going to do with those cards?
May 7, 2009 at 3:37 pm
Jane:
I am re-reading your post:
“if the emergency drew on we could refi the mortgage”
The bank does not have to agree to this. If the emergency is because someone lost a job or a reduction in income, you may not get approved for refinancing.
With and EF, you are not dependent on someone else approving your wishes.
Here is an exercise for the LOC as EF for 6-12 months:
1- calculate the minimum payment on using up your _entire_ LOC (3-5% per month depending on the agreement)
2- make your budget assuming that you have to repay your LOC
3- take the amount you would have to pay towards your LOC and put it in an EF
Can you live off that budget?
(Now think about the emergency and how it affects your income.)
May 7, 2009 at 3:46 pm
Darn! I just did the math I mentioned above (for the fun of it).
LOC $5000 at 3%: $150/mo ($250 if 5%)
LOC $10000 at 3%: $300/mo
LOC $20000 at 3%: $600/mo ($1000 if 5%)
I hope your LOC is small!
Quite a financial obligation.
May 7, 2009 at 4:21 pm
[quote]
I did find a good use for a LOC:
clearing a check without having to wait for 5-7 days!
[/quote]
My banker informed me of another good one when I recently renewed my mortgage… I can have it and not tap it, but it prevents a fraudster from coming along and putting a second mortgage on my house without my knowledge. Since the LoC costs $0 if you don’t tap it, I went ahead and did it.
May 7, 2009 at 4:31 pm
It’s like Gail’s talking right to me today…
I have a EF saved up…. it’s almost $10G, not 6 months, but not bad. The thing is, it’s driving me crazy just sitting there! I have to hold myself back from plunking it on the mortgage or topping up my piddly RRSPs!!!! But, I have to be practical. I can’t do it all at once.
My feelings are that if my old car dies prematurely it is an emergency, indeed it is partly what I am saving it for. I can’t beat myself up for not having the car-replacement separate. Likewise for essential home maintanence. These things in the ideal world would be all in their own accounts, reaching their own goals, but I just love seeing the BIG balance all in one place, and getting bigger to cover those things.
May 7, 2009 at 4:34 pm
I am single with a single income, and have all the living expenses if I wasn’t on my own… and about two years ago, I decided I had to start *some* type of savings. I signed up with ING Direct, and every bi-weekly pay, I automatically have a small set amount deposited into the ING account. I don’t see it when doing my own online banking. I don’t go look at it. I don’t think about it. It’s as if I don’t have that money anymore, and it’s no longer a temptation to spend. Also, twice a year, I end up with an extra pay in the month, so I will then log onto the ING website, and do a one-time deposite of a higher percentage of that pay. Easy come, easy squirrel away.
May 7, 2009 at 8:04 pm
Setting up automatic savings into ING is a great way to build your emergency fund. I every thought we would be able to “save” as much as we do, but with it coming out weekly, you don’t even notice.
May 7, 2009 at 9:00 pm
An emergency fund should be essentially liquid. In my personal view it should only be used if you lose your job or something similar. By the end of the summer I should have 6 months of essential spending. I long ago looked at my budget to see what I could cut from my budget if I were to lose my job. I have a seperate account for monthly housing expenses and I am getting ready to open an account for repair, maintenance and improvements. I also have a car account. There are many things I would love to have done on my house but my rule is that I must be able to pay cash. I actually look at all of my accounts regularly because I love to watch them grow. Good luck to those starting the journey every dollar makes a difference.
May 8, 2009 at 6:38 am
WOW! awesome post Gail. Reading people’s comments and stories about emergency funds has been inspirational for me. Due to my HR rep quoting me the wrong amount for my pension buyback after returning from mat leave, I got stuck with a $1800 suprise. I guess my employer thinks “I’m richer then I think” b/c they debited my pay for that amt without telling me. If I didn’t have savings I’d be in a world of hurt. After reading some of other people’s experiences I immediately transferred money back to my emergency fund to start to build it back up.
May 8, 2009 at 7:31 am
I too keep my EF, as one lump sum…i.e. job loss, major repairs, new vehicle etc….I use a money market mutual fund…( I still like mutual funds lol)…since having a job, a roof over our head and reliable transportation are all very very important I consider them all part and parcel of the EF…so far it’s working well…I have planned spending for the little extras or the fun stuff and retirement savings for retirement…there is also resp for the youngest son’s education and another long term savings for our eldest son’s care (he is severly autistic and will always need care)…so far so good:)
May 8, 2009 at 11:04 am
Good point on the bank not refinancing if our incomes were gone – I don’t really think about it as moving backwards if I had to refinance because we have been paying so much extra on our mortgage (money that would have gone into an EF) we would just be back to ‘normal’ if we had an emergency. But if the bank refused to refi though obviously that wouldn’t work.
I’ll have to think about it a little more. My business has about a years worth of retained earnings in a brokerage account but they aren’t exactly in low-risk/EF markets. The TFSA is pretty low-risk but again not cash.
May 8, 2009 at 11:53 am
The TFSA can hold cash, GICs, T-bills, mutual funds, stocks, …
Cash has lower interest, is safe, and readily accessible.
GIC has a slightly higher return, is safe, but not necessarily readily accessible.
MF: money market (lowest risk), bond (small risk), equity (higher risk). Accessibility without penalty depends on each fund.
May 8, 2009 at 5:42 pm
An emergency fund is a good safety net and gives peace of mind. Our furbaby had surgery today (found out at 9, surgery by 11) and it’s nice to know the $$ is there. However, I put it on our credit card and it will be paid in full at the end of this month – with no interest. It is the only thing on it. The emergency still fund thrives…..and a credit card is useful as long as it is paid in full each month and used wisely.
May 9, 2009 at 4:17 pm
OMG! I just realized that I’m one of those people who have “emergencies” when the money in my savings account starts to get high.
I defer extra cash into my savings figuring it would be used later for car repairs, vacations, unemployment, etc., but it always seems to get frittered away throughout the year. I just set up “savings goals” in my accounting software to separate the money, so I don’t spend my emergency money on vacations and the like. I’m gonna try Elizabeth’s 40/30/10/10/10 system (previous post). It makes alot of sense.
May 9, 2009 at 5:53 pm
6 months of emergency funds does seems SO FAR away.
I also have a PAC to an ING act. I like that I can’t access without thinking about it.
I like the idea of baby steps. It just seems that as soon as I have a chance to save some extra, those needs come up – vet bills etc.
My dog is 12 and likely won’t be with me too much longer. I know now that I will not adopt a new dog until I have the money set aside for the initial costs (spaying/needles/licences etc) and atleast $500 in a “pet” account for unexpected costs. We have another dog currently, and I plan to build up an emergency vet fund for him too.
There are so many possible expenses that sometimes it’s hard to think of them all. I know I need to start to budget more for quarterly car servicing, ordering wood for heat, and filling the oil tank too.
Marie: I think the suggestion to save what your minimum pymt *would* be is wonderful! It’s very realistic thinking!
Alexandra: I’m glad to hear your diagnosis looks good. *sending you healing vibes and well wishes*
Agatha: Good luck with the job hunt. I hope you find something fabulous!
Thanks for keeping me on my toes Gail. You always give great “foof for thought”.
May 15, 2009 at 7:27 am
[...] Unsurprisingly, Gail has strong opinions on the need for an emergency fund and whether a line of credit qualifies as…. [...]
May 15, 2009 at 8:22 am
[...] Unsurprisingly, Gail has strong opinions on the need for an emergency fund and whether a line of credit qualifies as…. [...]
May 15, 2009 at 8:23 am
Big fan of the EF – I’ve got about 12 months expenses in a savings account.
Marie, the cost you’ve calculated for the LOC is actually annual, not monthly. Interest rates are annual, not monthly, so the cost is about 1/12 of that calculated. Not that I’m a fan of LOCs…
May 15, 2009 at 9:42 am
Ben:
“low minimum repayments of just $60 or 3% of your balance, whichever is greater “. I assume they want more than $60/year. Correct me if I am wrong. (I never used it.)
February 11, 2010 at 12:50 am
Wonderful Web site!