Size of Emergency fund

[George]

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

[GeanOliveira]

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

Can we also consider a LOC as an emergency fund?

[George]

I don't really include our LOC as part of our emergency fund, since in the case of a true emergency (major illness or job loss), it's quite possible that the lender would either reduce the credit available or mandate payments on the loaned amount.

[FrugalTrader]

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

I think it really depends on the "type" of income as well. For example a business owner with variable income should have a larger cash reserve than someone working for the government.

We personally have a tendency to build cash reserves. We're comfortable in the $10-$20k cash range.

[CanadianCapitalist]

I'm curious as to whether this is bigger or smaller than what other people might aim for.

We keep about 3 months expenses in cash, say between $10K to $20K. I don't consider LOC as an emergency fund. It is hard to say what is the "right" number because it depends on family circumstances. A two-income family has less risk than an one-income family. A two-income family where the spouses work in different fields / sectors may have more/less risk than another family where both work in the same place. For instance, a few years back both of us worked in the private sector. Now, one of us works for the government and so the risk of a job loss is a lot less.

I would say that "enough cash reserves to sleep well at night" would be a good thumb rule.

[Canadian Finance]

I know it sounds bad, but I'm not a huge fan of emergency funds.

The reason being that you would normally come out ahead paying off any debt, reducing your mortgage, or investing for a longer time frame.

In a true emergency, using a credit line, or even withdrawing from your RRSPs would work. Any emergency should be temporary and these would provide you with the ability to survive.

All that said, if I did decide to have an emergency fund, I'd only fund a savings account in a TFSA for one year / $5000 and that would be the max.

[fifi]

I consider our LOC our reserve fund as well. I also think that the $2000 min balance we keep to keep our bank fees at $0 could be considered reserve cash.

[lb71]

I know it sounds bad, but I'm not a huge fan of emergency funds.
I would agree with you, but it also depends on the circumstances of the individual. I also use my LOC as an emergency fund because I feel that any money set aside could be better used to reduce my current mortgage. Also my wife and I are in different industries, so the risk of both of us losing our jobs is very slim.

[chilly]

I aim for roughly 3 months of expenses in my E fund.

This brings me to a related question. I'm using a dedicated high interest savings account for the E fund. However, I'm wondering whether it would be a good idea, for example, to use a TFSA for the E fund, and invest a portion of the $ into a money market fund for instance.

The rationale is that the interest from the money market fund is higher than that of the savings account, and the tax-free component of the TFSA vehicle of course makes this attractive. I do want to make sure, however, that the $ in the account is liquid.

Has anyone done something like this? Any comments/suggestions/pitfalls?

[moneygardener]

http://themoneygardener.com/2007/10/defying-cash-emergency-funds.html

I don't feel like the traditional meaning makes sense for us.

[Patricia]

I like to keep about $5000.00 in easily accessable funds at all times. These are usually in a combination of short term deposits and high interest accounts. When savings exceed this amount I tend to reinvest the money in longer term investments.

[Sampson]

I'm in the 1.5 months range, although recent events have made us get closer to the 3 month range.

We don't have a true emergency fund per se, as I sorta consider it as cash in our portfolio allocation, ready to use it any time now....:cool:

[DAvid]

Our emergency "fund" includes the following:

all accelerated mortgage payments
6 months + of accumulated sick leave
Banked overtime
Banked Vacation
LTD plan
RRSP
TFSA
investment portfolio
Employment insurance
"Passive" income

Spouses income

The passive income would cover all our necessary (household) bills, except some food.

DAvid

[CanadianCapitalist]

The passive income would cover all our necessary (household) bills, except some food.


I agree with this point. You'll have to figure in EI benefits, passive income via dividends and in a pinch even the fixed income in your RRSP (if it's a question of survival). There is also the potential to reduce expenses in some situations. For instance, if one of us loses a job, we'd definitely think about pulling the kids out of daycare.

My 3 months estimate is assuming I maintain our current expenses. YMMV.

[Arcaneind]

With my wife & I being in an extremely stable government jobs with seniority, we use our LOC as an emergency fund. We have the money in savings, but we don't think of it like that.

[Phalene]

Our emergency fund is currently 12 000 (we plan to bump it up to 15k over the next year or two). This money is held in a high interest savings account.

[mfd]

We decided that we were comfortable if we had an emergency fund for a year. So we are currently saving up $30k

[ethos1]

Our emergency "fund" includes the following:

all accelerated mortgage payments
6 months + of accumulated sick leave
Banked overtime
Banked Vacation
LTD plan
RRSP
TFSA
investment portfolio
Employment insurance
"Passive" income

Spouses income

The passive income would cover all our necessary (household) bills, except some food.

DAvid

DAvid, I really like the list that you have provided.

Do you mind me asking, what do you classify as passive income

[The Financial Blogger]

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.


Hey George, have you think to simply get a line of credit of 20K and never use it unless it would be for your emergency fund? If you think of the odd of using your full 20K as emergency fund during your life, chances are that you would be better off investing that money and make a much better return than the 1.5%-2% in a money market fund.

On the other side, the cost of a line of credit may vary. The cost of interest would probably be around 7%-8%... if you ever use it!

[Northern Engineer]

Hey George, have you think to simply get a line of credit of 20K and never use it unless it would be for your emergency fund? If you think of the odd of using your full 20K as emergency fund during your life, chances are that you would be better off investing that money and make a much better return than the 1.5%-2% in a money market fund.

On the other side, the cost of a line of credit may vary. The cost of interest would probably be around 7%-8%... if you ever use it!

I like the idea of a combination of those. A small emergency fund of $1000-2000 to cover insurance deductibles, furnace breakdowns, etc., kept in a high interest savings account. A LOC to be used only to supplement EI, disability, or whatever else, and otherwise kept at a balance of zero.

Once my student LOC is paid off, I'll look into this, but until then, it's a cash only emergency fund.

[Financial Highway]

I think Emergency funds are important part of financial planning, but at the same time if you have set-up proper protection in you planning there will not be a need for a large Emergency Fund.

If you loose your job you have EI for up to 52 weeks, If you get sick you probably have some sort of disability insurance etc......

We hold about 1-2 month worth of EXPENSES in a High interest savings account, we also have a LOC. I do not like money sitting idle :)

[bingfot]

Our emergency fund isn't as high as it should be (currently approx $3000) but we're increasing it $100 per month indefinitely..

[seven3]

Chilly - which MMF funds have you seen pay a higher rate that the high-rate savings accounts? I looked into it a month ago and found that the high-rate savings accts are best for cash right now (even though they're all below 2% now)

[83gemini]

I'm aiming (in the expectation of unemployment when my contract is up) for a year's expenses. Hopefully 9 months of the that will be the start of a down payment instead.

[lister]

This year we're trying to aim for $10000 and then repeating that next year for $20000. At that point monies will be saved for a wedding and we may dip in to the emergency fund a bit for that as well.

[sa44ron]

Emergency Fund
With a home equity line of credit, the excess room is the emergency fund. Why have six months income sitting in a savings account at 1/4 percent taxable interest income? And at the same time be paying 4 percent interest on the line of credit?

[The Financial Blogger]

I like the idea of a combination of those. A small emergency fund of $1000-2000 to cover insurance deductibles, furnace breakdowns, etc., kept in a high interest savings account. A LOC to be used only to supplement EI, disability, or whatever else, and otherwise kept at a balance of zero.

Once my student LOC is paid off, I'll look into this, but until then, it's a cash only emergency fund.

I agree with you to keep a few thousand bucks aside. Many banks will actually spare you bank account fees if you hold a certain balance in your account (usually between $1,500 and $3,000). Therefore, you will be making a good return (considering what you save in fees, you will probably be making 3 to 5% net of taxes!) and have a small emergency fund as well :-D

[rusty]

We used to keep about $5K in an ING account but have since used it to pay down the mortgage. We now consider the HELOC for the emergency fund.

[MTNG]

I'm aiming for 6 months of total expenses.

[Hampton N/S]

Although I believe in Insurance I don't believe in over-insuring for every possible risk.
So an emergency fund is a measure of your adversity to risk.

We consider our HELOC our emergency fund.
We use our extra cash to pay down mortgage, purchase a vacation home/investment property.
We are both professionals and unemployment will not be too long- yes I'm an optimist (most of the time).
We have insured against my self-employed spouse's disability.

I know all the books say have an emergency fund but I think it is so personal a choice - I like my money working for me more than a low interest rate of return from a bank.

[George]

I'm amazed at how averse people seem to be from having a large (say, $10000+) cash reserve, preferring instead to utilize a line of credit as an "emergency" fund.

My concern with a LOC is that it's tempting to over-withdraw in a time of emergency, leaving you with a huge hole to dig yourself out of once the emergency passes. At least if it's YOUR money that you're spending from the emergency fund, you're more likely to conserve it to make it last as long as possible.

Of course, it could just be that I'm averse to risk. My wife and I will have $20k in a high-interest savings account within the next few months, and plan on leaving the money there indefinitely. We both have stable jobs (government and health care) but I like the idea of covering as many angles as possible.

Sure, I might not earn as much money on the pile of cash as I would if I tossed it toward our mortgage or invested it for the long term, but for the time being it gives me a huge measure of comfort.

[DAvid]

DAvid, I really like the list that you have provided.

Do you mind me asking, what do you classify as passive income

Income that arrives without an expenditure of effort on my part.

DAvid

[bgc_fan]

I agree with George. I personally have a small emergency fund held in an high interest account, and find it counter intuitive to use a LOC as a source of funds in an emergency. If I was in a financial emergency, or if some sort of surprise cost appears (say, minor roof repairs), the last thing I'd want is to start taking on debt, even if it is considered low interest.

But then again, everyone is different.

[MoneyEnergy]

I agree with George and bgc_fan that using a LOC, or worse, a credit card, for an "emergency fund" is a bad idea. But when you're still just getting started on that E-fund (as I am, unfortunately!) I'm not sure there's much way around it. As I'm in graduate school currently, I don't have alot of room to maneuvre financially, so it's important to keep all my expenditures moderate and balanced. I've started an e-fund, but it's going to take a bit to build it up. I'd like at least $5000 in it for now, but I'm going to have to start with $500, then $1000...

[Northern Engineer]

My concern with a LOC is that it's tempting to over-withdraw in a time of emergency, leaving you with a huge hole to dig yourself out of once the emergency passes. At least if it's YOUR money that you're spending from the emergency fund, you're more likely to conserve it to make it last as long as possible.


That depends on the person, though. Given the experience I'm having getting out of a LOC hole that I dug, I'm sure that I won't be tempted to put myself in this position again, should I get into using the LOC. I don't know if the others advocating the LOC are the same, but if I wasn't sure that I could treat it like my own money, I wouldn't use it.

I agree with George. I personally have a small emergency fund held in an high interest account, and find it counter intuitive to use a LOC as a source of funds in an emergency. If I was in a financial emergency, or if some sort of surprise cost appears (say, minor roof repairs), the last thing I'd want is to start taking on debt, even if it is considered low interest.

But then again, everyone is different.

I've never had my roof repaired, so I don't know what that costs, but I am keeping (and intend to keep) a small cash fund for situations like that (unless I discover that home-ownering comes with regular unexpected expenses that are larger than I think they are). In a worst case scenario of job loss or disability, the Emergency LOC will buy me enough time to liquidate my (non-retirement) investments if I have to. That way I have the access I would if I kept them in cash, but can invest them however I want.

This is all very theoretical, though, as I don't haven't created a decent emergency fund, yet. I've been thinking about it since this thread came up, and am liking the idea of holding a zero balance LOC more and more, so long as it's buffered by a few thousand in cash.

On a related note, has anyone actually tapped a LOC as an emergency fund? How did that work out?

[Ben]

I would also echo George's comments. We currently have a substantial amount of cash sitting in "high" interest savings accounts.

I am a little perturbed, but not surprised, at the willingness of so many to relay almost entirely on the LOC as the safety net between having your home and lifestyle, and not having those things.

I would be very curious to see a study on how the approach to using/having LOC's as the emergency fund varies with the person's age. For me, I am young, and familiar with the propaganda of the boom decade that just ended ("You're a fool to leave cash sitting around, put it to work and earn 10% in the stock market). For others who have posted here, and are also young, we have to remember that all we know are boom times. We have never been through a recession, nor lost our jobs, nor had our house values deflate. The previous generation has seen a couple of recessions, and real estate busts. The generation before that - well, let's just say there's a good reason why grandparents collectively are a wealthy generation.

It could happen to our generation too, and I believe that it will in the coming couple of years. Our jobs are not a right, and real estate does not always go up. Your SLOC is good only as long as your house is worth more than the mortgage. After that, there's nothing left to secure it. For those with less than 25% equity in your house, there's an outside chance that the value of your house in 2 years time will be less than your mortgage. If that were to happen, how would you then deal with a job loss? And compound that with the possibility that you lost your job at the same time as your wife was home on maternity.

Job security will be poor for the next couple of years in this country, with varying degrees of weakness depending on the province. Ontario in particular is in for a rough ride. Once a job it lost, it will be much harder to find a job paying comparable wages than when we first got out of school. House values will decline in all provinces in this country - some areas will slide hardly a bit, and others more significantly.

This is not 2007 anymore. We need a fundamental change in our attitudes toward debt to see us through what will be a very challenging couple of years. For me, it's fundamental - I cannot be sure that a LOC I have today will be there for me when I need it tomorrow. Credit is not cash, and credit can be taken away at the least opportune time. I want more standing between me and foreclosure than the whim of a bad bank manager.

I challenge you to build up a cash emergency fund in the next months. You will not regret doing it, but you may regret not doing it.

[maniac]

I too think it's crazy to rely on LOC for an emergency fund. We've all seen what's coming by watching the US experience. If you lose your job and can't find a new one for months and months the LOC will let you down. That's not a risk I'd ever take. If you rely on your LOC for an emergency fund you are fairly close to the edge and by that I mean the street. Think about what would happen if BOOM tomorrow you lost your job, you LOC and your credit cards. How long will it take before you are on the street begging for change? It's happened to lots of people lately and I'm talking middle class people.

[CanadianCapitalist]

I am a little perturbed, but not surprised, at the willingness of so many to relay almost entirely on the LOC as the safety net between having your home and lifestyle, and not having those things.


I used to question the wisdom of emergency funds (such as in this old post "Are Emergency Funds for Everyone? (http://www.canadiancapitalist.com/2005/03/13/are-emergency-funds-for-everyone)") but I've long since changed my opinion. The reason: when I first obtained a secured LOC, the agreement clearly states "We may ask you to repay the loan at any time for any reason". I believe this is standard in all LOCs. That made me worry that when I really want a loan, it may not be there. Or worse, obtained a loan only to find that the bank wants the money back. Admittedly, this is a low probability scenario, but that doesn't mean that the risk isn't there. I've decided that I'd rather sleep well at night knowing there is some cold, hard cash tucked away just in case.

[MGL]

CC, it's not as low probability as you might think. If you lose your job and your other debts are creeping higher, banks are quite willing to pull the plug on your LOC, particularly if it's unsecured. The purpose of an emergency fund is to provide for your needs when the unexpected strikes, and it is at precisely those times that your access to credit is most in jeopardy.

[Alexandra]

My good friend miscalculated how much he had put into his RRSPs this year, and realized at the last day that he had about 5K of extra room. He went to take money out of his LOC, the one he had set up years ago as his emergency fund. To his surprise, there was an invisible hold on it, due to its inactive state. The bank was more than happy to resurrect it...it would just take three business days.

So for those if you leaving an LOC unused as your emergency fund, be advised that they can "time out" and need to be reactivated, at the bank's convenience.

I didn't know this either.

(By the way, my friend went to the bank down the street who gave him an RRSP loan on the spot.)

[stephenheath]

I've always kept a $2000 small cash emergency account just for small emergencies (I refuse to pay interest on a credit card), but before the TFSA I'd put the extra onto the mortgage because the spread between the interest I was paying and what I was getting after taxes was huge.

Now with the TFSA I am maxxing it out first each year, and that $10k per year may be my emergency fund, or it might be my "need to buy a new car and don't want more payments" fund, or it might wind up being "the TFSA is big enough to pay off the mortgage now" fund... the nice thing is, since it is gaining interest tax free, the spread between extra mortgage payments and saving is so small that it is worth having the flexibility.

[lazy cdn]

your emergency fund shouild mirror your investment portfolio .... it should be big enough to make you smile, and small enough to make you walk away from it. Because thats whats going to happen to your emergency fund, in an emergency.

[markievicz]

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

But doesn't this "standard advice" mostly come from US sources? One of the things that I found hard to wrap my head around after moving from the US to Canada was the lower level of individual risk I carry here ... I know if I'm laid off tomorrow I don't need to worry about COBRA and if I find out I'm pregnant tomorrow I'll have 12-ish months mat leave. Things are significantly different for my USian counterpart.

[tomasz.gorecki]

If you are making ends meet each month and use credit or LOC as your emergency fund, how do you avoid not going into debt when you have no money to pay off the debt?

Am I the only one thinking that people are just lazy and will use credit because its so easy and then pay for it with interest.

[Hazelnut]

When I was younger and I had an emergency I was able to borrow interest-free from my dad, so I guess HE was my emergency fund. Now I find that I'm never satisfied with how much is my emergency fund. I thought I would feel comfortable once I had $10,000 socked away, now I want $15,000. Sometimes I wonder why I feel the need for such a large cushion - I think it's just the weight of our economic times weighing me down.

[mfd]

When I was younger and I had an emergency I was able to borrow interest-free from my dad, so I guess HE was my emergency fund. Now I find that I'm never satisfied with how much is my emergency fund. I thought I would feel comfortable once I had $10,000 socked away, now I want $15,000. Sometimes I wonder why I feel the need for such a large cushion - I think it's just the weight of our economic times weighing me down.

Maybe its the fact that you like watching that bank account grow. I find there is an addictive property to having a large pile of cash in the bank.

[ShowMeTheMoney]

It really depends on your circumstances. I use my secured LOC as an emergency fund, to pay for large emergency purchases like a roof or furnace. I pay it off as fast as I can. But I have a secure job where I would get a year's notice if my 5 year contract was not renewed. If that were to happen I'd save every penny I could in that year, making minimum payments to the mortgage, and build up the fund that way until I find a new job. I can save enough in a year to last almost a year, otherwise, it goes to the mortgage. I'd be in trouble if the roof caved in that year I guess, but it's new and so is the furnace, and both are paid off. And there's EI which will make my savings last longer.
Once my mortgage is paid off, then I would not use the LOC at all, except maybe for an investment loan. With no mortgage (and a job) I could then afford to save up for an e-fund, and anything else I might want or need.

[Retireat50]

I am in the camp of sleeping better at night and must have enough liquid funds available to account for any emergency. ie furnace, roof, major appliances, car repair, or purchase, etc. I would not like going into debt for any purchase that is not going to make money for me. I voted for $20,0000+

[Rickson9]

I am in the camp of sleeping better at night and must have enough liquid funds available to account for any emergency. ie furnace, roof, major appliances, car repair, or purchase, etc. I would not like going into debt for any purchase that is not going to make money for me. I voted for $20,0000+

The wife and I agree with this.

[Hazelnut]

Maybe its the fact that you like watching that bank account grow. I find there is an addictive property to having a large pile of cash in the bank.

MFD - you might be on to something there - I do love watching it grow and hate to use it for anything. You can't have your cake and eat it too!