In life, you should expect the unexpected — that’s why you need an emergency fund.
Depending on your situation, an ‘emergency’ can be many things. But keep in mind, there’s a difference between what you really need and the things that you wish you had. A new big screen TV doesn’t qualify as an emergency, even if your old TV breaks down.
Some situations that constitute emergencies might include:
- A health emergency. In Canada, much of our healthcare is covered by the government. But what if you need services that aren’t covered, such as dental work, expensive prescription drugs, or new glasses?
- Travel expenses. You may have to travel to care for a sick family member or attend a funeral.
- Unexpected loss of income. You may lose your job, or maybe have a temporary downturn in your income levels.
- Major car repairs. What if your alternator fails or your timing belt snaps?
- The failure of a major appliance. If your water heater bursts, you may need to pay for a replacement quickly.
- Unexpected home repairs. Insurance will cover accidental damage to your home, but not everything is covered, such as basement flooding.
How big should your emergency fund be?
The answer to this question depends on a number of factors. If you have children or significant debt, you may want to save more. If you have excellent insurance, you may be able to put away less. Every situation is unique, but three to six months of income is typically recommended.
Seeing your financial advisor can help you decide how much money you need to keep in reserve.
However much you decide to put away, knowing that you have an emergency fund can give you peace of mind. Your money is on guard, so to speak, just waiting to be called into action. You don’t have to scramble to come up with money you need and you don’t have to turn to credit cards. Even if your emergency fund isn’t big enough to handle everything, it can still help reduce the amount of money you must look for from other sources.