A Family Emergency is a matter of WHEN not IF. You don’t need to have children for a family emergency to happen. But they do seem to come up more frequently, and have a greater impact, when you have kidlies.
Be financially prepared for these events with an Emergency Fund.
In my article‘Household Financial Plan The First Step – Setting Financial Goals’ I talk about a situation Kernel and I got into financially a couple of years into our marriage. In case you missed that one, Kernel broke himself after one of his shifts in the company parking lot.
He was off of work for months.
The first couple of months after his event, all bills, except for rent and groceries were not paid. The car we had at the time was a stick shift and he was the only one who knew how to drive it. We incurred increased costs for public transit for me and taxis for him.
We dug ourselves into a financial hole. If we had an emergency fund we would have been able to keep up with our expenses and the transportation costs.
We didn’t, so we couldn’t.
Paying off those deferred bills became a Short Term savings goal. Buying a vehicle I could drive became a Mid-Term goal . We also decided to make saving an Emergency Fund one of our S.M.A.R.T goals.
What is an Emergency Fund Emergency?
Not all emergencies are like the one Kernel and I went through. It can be as small as not having cab fare to get a sick child to the hospital quickly or being able to quickly cover a vet expense.
I define an emergency this way:
Some common examples of an Emergency Fund Emergency are:
- Job Loss – the number one reason in this economy to have an Emergency Fund.
- Medical or Dental – A sudden need for crutches or a broken teeth sports accident.
- Home Repairs – Burst water heater , leaky roof or your child puts a rock through a neighbours window.
- Sudden Car Repairs – Broken tie rod or a nail in your tire.
- Vet Bill – Cats and dogs will eat almost anything.
- Bereavement Related Expenses – Items that may need to be paid out before insurance funds are released or travel to say a last good-bye.
- Natural Disasters – Flooded basements, evacuations or interim expenses.
- Road Trip Break Downs – This happens more than I’d like.
When it comes down to it, what you deem as an Emergency Fund type of emergency will be a personal choice. What an emergency is, is important to define so you know how much to save.
Write your families definition of an Emergency Fund Emergency on this work sheet:
What an Emergency is NOT
Just as important as knowing how your family defines an emergency is knowing what an emergency is NOT. Below are definitely not emergencies:
- A new pair of shoes or dress for an event
- A pizza when you don’t feel like cooking
- A way to keep the kidlies from throwing a temper tantrum in the store
- A new stereo system for your vehicle
- A replacement television
If it is something that does not cause a major malfunction or damage to your family and/or household, it’s not an emergency.
How Much Should You Have in an Emergency Fund?
Every household and living situation will have a different answer for this. If you are a student, living at home, with very few responsibilities the amount you save will differ from a single income family with a mortgage and on-going medical expenses.
Regardless of the type of financial reality you live in, just the words ‘Emergency Fund’ can be a jittery thought – even without a dollar figure.
My suggestion here is to just get it started. Set some Short, Mid and Long term goals for your Emergency Fund and add them to your planner.
A good Short Term goal for your Emergency Fund could be $100.00 to $250.00 dollars. It will be enough to cover:
- Cab fare to get your teen home from a party you didn’t know about – $40.00
- Purchase crutches not covered by the Health Region – $39.00
- Pay for a tow and tire repair when you are out of town – $145.00
A reasonable Mid-Term Goal to shoot for is $1000.00 – $1500.00:
- One months rent if you had to take time off to heal – $1200.00
- Replacement rear windshield – $1142.00
- 2 nights in a hotel and meals because your flight is weather delayed – $420.00
When you have your first $50.00 set aside, shoot for another $50.00 to bring it to $100.00 and so on.
Keep saving in small increments when you can, whatever you can. By setting and reaching little goals along the way, it keeps you motivated to continue saving. Smaller amounts also don’t interfere too much with your budget when you are living on a very tight one.
It is also a way to gradually learn the discipline needed to not use those Emergency Funds for anything but an emergency.
*** Quick Note *** The examples and amounts used above are from my personal experience. This is just a small example of how we define Emergency Fund emergencies in our home and some happenings that have encouraged us to continue to save one.
Long Term Emergency Fund Goals
Long Term goals for your Emergency Fund are the ones with the amounts that make people nervous. This is what you are saving for in case of job loss or an uninsured situation. The amount here seems to differ depending on whose advise you are reading.
The goal in our household is 3 months of household income. It is a tough number save. I know it. It seems there are several emergencies that have popped up since setting this goal. But I can tell you first hand the perseverance brings peace of mind.
The Royal Bank of Canada has an Emergency Fund calculator that can help you determine the amount for a 3 months of income Long Term goal.
Don’t let the amount frighten you. Just allow it to be a long term target.
When Kernel and I reached the 1 month target and we went back to setting Short and Mid-Term goals as a way to motivate ourselves to continue reaching targets.
Ultimately the amount in an Emergency Fund is a personal choice and the bench mark can only be set by what your family feels is best.
Where to Keep Your Emergency Fund
You are driving home after a long road trip. Only a couple hours left to go. It’s 2 am and the traffic is light, almost non-existent. Suddenly, your tire blows. You need to pay for a tow truck, a tire repair and most importantly – a coffee.
This is most defiantly an Emergency Fund Emergency. Are your Emergency Funds accessible?
I feel it is important to keep your Emergency Fund savings separate from your day-to-day funds. It takes a great deal of discipline to keep remembering to separate the two so a separate account that requires a little extra effort to access is a good idea.
So where do you hold them?
The key to having an Emergency Fund when you need it is access and the three main factors of an emergency fund saving vehicle are:
- Liquidity – When an emergency happens you don’t want to have to wait to sell or be forced to sell when the markets are low. You need your money quickly.
- Availability – The ability to get to your emergency funds and have them immediately available during the crisis.
- Low Risk Savings Vehicle – If you have your money invested in something too risky, you may end up losing your principal. This just puts you back to square one in the savings cycle.
A Personal Journey
Kernel and I have chosen to take a diversified approach when it comes to holding our Emergency Fund savings.
We keep a small amount of cash ($50.00) set aside at home. This is immediately accessible, though it doesn’t earn any interest. When we doubled this amount we took the second portion to the next level.
Our Short Term goal amount keeps in our chequing account. This is when the true discipline of saving an Emergency Fund came in to play for us.
Not touching the Short Term goal amount was easy. But while we saved to double it, we had to continually remind each other what portion belonged to the Emergency Savings goal and not the day-to-day household.
High Yield Savings Account
When it was finally doubled, we moved the second amount to a high yield savings account and began saving for our Mid-Term goal. This account is a no-fee internet bank account that has a separate debit card from our chequings account. This amount is immediately accessible.
Tax Free Savings Account
When we reached our Mid-Term goal amount we transferred all but $20.00 into a Tax Free Savings Account (TFSA) because we do have to pay taxes on the interest earned. Then we started saving our Mid-Term goal amount again.
The TFSA holds our Long-Term savings goal amounts. We chose to keep the 1 month of income amount in a cash portion (It takes 2 days to access it) and we are building a portion in the available investment options to earn a little as we save while keeping the funds accessible.
You can start in those for as little as $200.00 (the institution you start your TFSA with may have other options that you can start for less. Ask your financial adviser).
This is the route we chose to take for our Emergency Fund savings. It is working for us, but may not be the best fit for you. Ask a Financial Adviser for the best options for your personal situation, needs and goals.
I wanted to share our experience with starting from debt to being able to cover our assets to point out to you that it can be done. We have been at this slowly for more than a decade. It does take time.
***Quick Word*** Emergency Fund Saving While in Debt
Kernel and I were carrying debt when he busted himself up and we realized too late the importance of having an Emergency Fund. We made a choice to prioritize saving while paying down our debts. It was a smaller amount, but it was an amount. The important thing is to just start. Please don’t learn the hard way like we did. Even a little peace of mind is peace.
Have you started your Emergency Fund savings yet?
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