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February 02, 2023

Equity.Guru

Investment information for the new generation

All Things Emergency Funds

I’m thinking of re-cutting bangs and no, this doesn’t mean I’m having a crisis. For whatever reason, the act of cutting the front pieces of your hair shorter than the rest of your hair has become inextricably linked to the notion of emotional catastrophe. You got fired from your job? Bangs. You went through a breakup? Bangs. Your car window was smashed, and they stole all your mints from the center console? Bangs.

Why can’t the creation story of the bang be as simple as a cute girl going about her uneventful October Monday who merely decided, time for a fresh look?

My theory (which is foolproof and correct) is that the problem with bangs, and haircuts in general, lies in the photos we take into the salon. People will walk into their local hairdresser and say, “I want something like this”. It will be a photo of a Victoria’s Secret model on the runway or a celebrity on the red carpet. Your hairdresser will oblige and then, because the chair turns around and you find out you are not, in fact, Dakota Johnson, you think your bangs look horrible. And then (as goes with a bad haircut), everything is horrible.

And now you’re staring down the barrel of six months to a year of weird barrettes and, I guess, headbands. You decide that the responsible thing to do is to hide your hideous mistake from the world until your forehead hairs rejoin the ranks of your back-of-head hairs.

And it is this 6-month hibernation that leads outsiders to say – she got bangs? Must have been an emergency.

The trick here is to recognize you were never Dakota Johnson to begin with. Which brings me to today’s pragmatic and deeply realistic topic, emergency funds.

 


Life is full of surprises, and in a sick turn of events, half of those surprises show up unwelcome. A national disaster, an illness, a breakup, a layoff, a blown transmission, etc.

All these things are exacerbated by the financial stress that comes along with them. A sudden loss of income can obviously make a mess of your finances and make you vulnerable to amassing huge credit card debts to cover expenses. We are not out here looking to subsist on $.30 packages of ramen in our 20s, 30s and God forbid 40s. This is where the Emergency Fund steps in to save the day

 


What is an Emergency Fund?

It is exactly what it sounds like – an easily-accessed source of funds that you’ll be able to use if things in your life temporarily go south. “Easily accessed” in this case should not mean stuffed under your mattress, a practice which an alarming number of people actually do. Not only will stashed cash be vulnerable to emergencies like theft or fire (ironic), but inflation will promise that any amount you stuff under the Casper will be worth less and less as the years go on.

 


The Proper and Shorter Emergency Fund Definition… 

An emergency fund is a sum of money safeguarded in case of a financial emergency such as illness or job loss. Most financial experts recommend that individuals or families have access to between three and six months of expenses kept in a cash-equivalent account. 

 


When Should I Start an Emergency Fund? 

The short answer? Yesterday. In another sick turn of events, emergencies happen unexpectedly. Your roof, rudely, will not be accommodating of your schedule if it chooses a time to cave in.

The best way to start an emergency fund is either with a little money or a lot of money. This was not a typo. There’s a possibility that once a year you’ll receive a windfall of several hundreds or even thousands of dollars in the glittering form of a tax return. (Or in the form of a work bonus or a cash gift from a flush relative.) Emergency fund established.

If you’re starting from square one and don’t suspect any windfalls on the horizon, this is a one foot in front of the other type thing. Tell your bank to squirrel off $50 or $100 dollars per month from your pay into savings. If you’re like me with my credit card, things like this will likely go unnoticed. A financial person would tell you to cut out your afternoon chai lattes – $7 a day adds up to $210 a month. But who am I to take away a person’s happiness?

A note of caution: before you start an emergency fund, or do anything else with your money, you’ll want to pay off any large credit card debts. The 15-20% APR that you’ll be paying to service your credit card debts are an emergency in and of themselves.

 


How Much Do I Need in my Emergency Fund?

3 to 6 months of your household income on hand at all times to deal with unforeseen emergencies. If you’re paranoid like I am, 8 to 12 months will really ensure that you are locked and loaded for disastrous circumstances.

Assess your situation; if you have a relative you could depend on for financial aid in a time of crisis you may only need to have 3 months of expenses on hand to still feel comfortable.

To figure out how much you need in your emergency fund, you must evaluate your monthly spending. The government seems to believe that these are our big expenses:

  • Home
  • Heating and other utilities
  • Clothing
  • Food
  • Health Insurance
  • Transportation

If you ask me, this list is missing entertainment, travel, wine, dark & stormy’s, and oat lattes.

A blogger recently broke down the monthly expenses of a single person living decently in Toronto and came up with $3,341.44 per month, or $40,097.28 a year after tax.

For this girl to experience no lifestyle change for 3 to 6 months, she would need to save between $10,024 (3 months) and $20,048 (6 months) in her emergency fund.

Obviously, big city living is considerably more expensive than suburban or rural living, so adjust accordingly.

 


Where to keep your emergency fund

You’ll need to be able to access your emergency fund within a day or two of something happening and you’ll want it to be there in total. This means that it would be the absolute wrong move to keep your emergency fund invested in any remotely speculative investment like stocks. Consider putting your emergency fund in…

A Savings Account.
You know them, you love them. They pay virtually no interest, but it beats a mattress and is easily accessible.

GIC (Guaranteed Investment Certificate).
This is a relatively secure place to stash your emergency fund. Be wary, however, that there will likely be a minimum period you’ll need to commit your funds in a GIC. Some banks offer higher interest rates in exchange for commitments to keep your funds in place for as long as five years. If you need the funds in a hurry, some GICs will assess stiff penalties. (Most GICs will have a minimum deposit of $500 or more).

High-Interest Savings Accounts.
My personal favorite because it’s what I use. The best of them offer no minimum deposit, no fees and unlimited withdrawals at no extra charge. Certain financial institutions offer interest rates as good or better than GICs.

 

Until the next…

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