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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.
Just Married
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?
Growing Family
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.
Emotional Relief
This is probably one of the major reason for an emergency fund. If it helps you sleep at night, go for it!
Ask Yourself
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?
What Is Your Emergency Fund?
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I think having an emergency fund is more important than all other types of savings. This is the first fund we will hit when the unexpected strikes and having a comfortable amount set aside is just prudent.
MoneyCone recently posted..Why I Chose A 30-Year Mortgage Even Though I Could Afford To Pay It Off In 15 Years
@Money Cone
Thanks for our comment. How do you define how much you need for it to be a comfortable amount? and do you adjust it as your life changes.
I think that emergency funds are a bit over rated among personal finance blogs. It is good if you are laid off, but a line of credit does the same thing without tying up your money.
I will always keep a line of credit as an emergency fund so all my savings can earn me money. Having an emergency fund means keeping it somewhere quickly accessible, also meaning it isn’t earning much interest. The best investments have some risk and keep your money for a while.
You wouldn’t want your emergency fund in stocks in case you are laid off during a down market. But keeping a line of credit costs nothing if you don’t use it and can be paid off slowly.
If you need an emergency fund you are going to cut back on frivolous expenses so the need isn’t as great as many people think. A line of credit can recover emergency repairs or a couple months of unemployment all while your money can be making money for you.
Poor Student recently posted..Housing Options For Students
Ayy,(☞ﾟヮﾟ)☞ I use a LOC too for my EF! I use any extra cash I have to either pay down debt or invest. The common rule that people should have 3-6 months of spending saved in an EF is often misplaced without the proper context (ಠ_ಠ)
I’m in my mid 20s and don’t have any dependents so my situation makes my decision simple. No need for an EF. But if I was in my 40s, flipping burgers at A&W and had to support a wife, kids, and had poor credit, with no investments, then I would definitely prioritize on building up an EF of at least $3,000 to insure my family can withstand any unexpected expenses or short term emergencies.
So I think your way of defining an emergency fund “road map” is the only way to meaningfully decide how much one needs to save for an emergency. Or not, and just use a LOC. Great idea.
I think emergency funds are pretty important. You never know when you need to fix your car or repair something on the house.
I wouldn’t want to “start” using my HELOC just because it could open up the flood gates, you know?
@YT
Thanks for your comments! I appreciate you sharing. I guess one of my point was lost in the end but after a while, you build assets and savings, do you still think you need an emergency fund?
When it comes to home ownership, make sure you also “plan” to save for work coming down the line. Maintenance and expenses can be foreseen at times. Unlike water damage or fire which I hope you have insurance for as that is very costly.
Emergency car fixes is on the list for you … That’s interesting. Servicing a car over time can add up but I never considered that to use an emergency fund. I tend to plan for the upcoming expenses based on the kilometers (miles for my friends south of the border). I actually have a spreadsheet tracking what I have done when and how much I paid and also outline what I should expect to do the bigger items.
Well I agree losing your job is probably top of the list for emergency fund usage, there are quite a few other scenarios I can think of to have one– major car accident, extended illness, death in the family (need to buy a planeticket and take time off work), pipes burst, etc, etc. Sure you can get insurance for some of that (comprehensive auto insurance for instance) or you could also save on insurance and get basic coverage because you know you have funds to buy a replacement ride if you do something stupid and write off what you have. A line of credit is a workable way to go as well since you’d have easy access to more cash in a pinch but don’t forget there are people who eschew debt and those who simply have bad credit who couldn’t rely on something like that. For most people, a buffer of one month’s wages seems like a good minimum to start with.
@CashMoney101
Thanks for your comments! I like what you added to the list of potential emergency usage. (Major accident and illness are tough ones – I don’t know if you can ever save enough in some cases)
You are right on all the points and all families/individuals have different income and expenses that they need to manage that can make the unforeseen an expensive expense. Part of the road map, I was trying to assess if at some point, one would stop having an emergency fund because they have enough savings and investments to possibly cover that.
When it comes to home or car, I hope people have the proper insurance. Over the last couple of years, we sometimes see on TV bruned down houses or condos and the owner/renter did not have insurance. For the most part, they are renters because anyone with a mortgage need insurance proof (although it’s not religiously tracked). As a renter you should really have insurance for your items and it’s not all that expensive. Probably cheaper than building an emergency fund.
We have a huge cash buffer right now. It’s partly due to my plan of leaving my job and also because the stock market is doing too well. I’m hoping for a little pull back so I can invest some of this money.
retirebyforty recently posted..Go It Alone
I recently decided to go full-time independent, so my emergency fund is also my liquidity fund. Until income ramps up more and comes from more baskets, this is the safest option for me at the moment.
Good post and good thoughts!
Invest It Wisely recently posted..Why You Need Spare Cash to Cover Emergencies
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Good post.
I don’t need a huge cash buffer, but I need some small emergency fund to sleep at night.
Our goal is to have our emergency fund to $10,000. Everything else will be fully invested, or used to pay down mortgage debt.
My Own Advisor recently posted..Weekend Reading – Tax returns, tax software giveaways and great blogs
@MOA
Thanks Mark for your comment. I think sleeping at night is important
Do you keep it invested in safe GIC or do you simply keep it in cash? In the laster case, I assume you don’t mind that your buffer doesn’t keep up with inflation…
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PIE, I am in the same school of thought as you are. I am single, no dependents, have a mortgage, have a decently secure job, I plan for home insurance, auto insurance, car/home maintenance, travel, etc into my budget. I have a LOC that I sort of look as my EF. However, I am slowly building up an cash EF as I considering a possible career change in the next few years. I guess technically it’s not an EF as it’s planned but I am going to call it that anyways, it’s easier.
Simple Rich Living recently posted..How I spend my dollar in 2012? – February
@Simple Rich Living
Well done on the planning! Once you have it built, will you be keeping it even after your employment transition?
Not sure whether I will keep it or not at this point. I think it will largely depend on what kind of job I transition into. If I get into a job/field that is not as secured as my current job, I may consider having an EF in case of job loss.
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It is very difficult for people to set aside emergency funds when they are struggling to meet everyday expenses. On minimum wage people don’t have discretionary funds to set anywhere. They are lucky to survive in any large city much less save for a rainy day.
Bureaucrats and politicians with cushy pensions and guaranteed incomes really should get out into the real world that people have to cope with on a daily basis. Stop wasting time and money on surveys that tell most of us what we already know.
Saving the money for a rainy day is a great idea. But you are right if you don’t have a plan that money can go pretty quickly. In an emergency you may need some extra money but it is important to stick to your plan for sure.
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