I wrote about the emergency fund dilemma in the past and it made me realize that everyone needs an emergency fund road map as opposed to just an emergency fund. It’s not just about having a fund, it’s about knowing what you need a fund for. Just like a budget needs to evolve, so does your emergency fund. Often time, you will read and hear about having an emergency fund to sustain you for 3 or 6 months but do you really need a fund? and what do you need it for?
Warning: This post may be controversial – Please share your thoughts
What Is An Emergency Fund?
Lets start with the definition. Are we all considering an emergency fund to be the same thing? The most common reason for a fund is to cover expenses in the case you lose employment. Is that your definition? What else is considered an emergency requiring a fund? You could probably have a fund in case of major disability but that’s a never ending fund in some cases if you want to be pessimistic … You can think of all the mortgage insurance a bank tries to sell you and that could be considered for an emergency fund. Anything else?
What I do not consider needing an emergency fund is car insurance, home insurance, renovation and anything else that should actually be budgeted and saved for.
Readers: What is your definition of an emergency fund?
Events For An Emergency Fund Review
In Your Early 20′s
You just finished school. You found your first job. You rent or live with your parents. Making ends meet is really what you have at the top of your list when you start working. You may have student loans which I hope you have a plan to pay it back. You may be thinking about saving (at least I hope you do ) and you want to make it on your own.
That basically describes what goes on for most when they get their first job after school with a variation here and there. Does it look like there is a need for an emergency fund? It’s probably very difficult to save in the first place let alone build an emergency fund.
It’s not about “me, myself and I” anymore. There are two of you. Do you have a need for an emergency fund at this stage? You might just be thinking – two income! Now what can we do if we reduce our costs Hopefully, you are thinking of saving here (TFSA anyone?). Unless your employment demands that you have some buffer (which is something you would plan), I am not sure that being married justifies having an emergency fund at this point. What do you have it for?
A growing family is a big change. You go from including a +1 to party invitation to negotiating evenings out with babysitters. Your expenses probably just went up and the need to budget is probably more important than ever. So far, you were thinking about RRSP and TFSA but you now have to consider a new acronym called RESP (Registered Education Savings Plan). With a growing family, what would trigger the usage of an emergency fund? The only condition I can think of to justify an emergency fund is the case of a job loss.
Buying a Place
Probably the first major purchase of your life. Hope you aren’t stretching yourself You’ve just made a major financial commitment and it’s important not to default on your payments. Does that mean you need to have an emergency fund now? If you can’t pay, what options do you have? If you can’t pay, that probably means you lost your income or did you overspend? We are back to justifying having an emergency fund in case you lose your employment.
Change of Career
Having a buffer can be very important in some career changes. Depending on the number of life changing events mentioned you have gone through, you may very well need an emergency fund. Career changes aren’t without their risks, especially if you decide to go on your own and start a business. You’ll need fund and it may be challenging to earn an income at times. Having an emergency fund would be wise. However, I’d like to point out that the emergency fund is actually a planned buffer to alleviate the risk in pursuing new opportunities. I recommend the practice.
This is probably one of the major reason for an emergency fund. If it helps you sleep at night, go for it!
In all the events listed above, the only case I can really see a need for an emergency fund is if you find yourself unemployed. Before you just go ahead and build an emergency fund, you need to ask yourself important questions. Here are the ones I can think of.
- What happens if I lose my job? Do you have a backup plan? I have had to think about this in the past 4 years considering my company has done layoffs a few times. The reality is that I would get a nice package. Better than any emergency funds I could have and I also have re-usable skills. What about you?
- Do I have employable skills? It’s important to not become complacent about your job and to understand your skills and new skills you would need.
- How long would it take to find another job? It’s important to be aware of employment in your region. The harder finding a new job is, the more you need that emergency fund.
- Can my family cope? What options do you have if you are faced with an unforeseen situation? Do you have family nearby you can rely upon?
- Will I sleep at night without an emergency fund?