Time to Revisit your Emergency Fund
It’s always been a good strategy to have an emergency fund set aside in case you face difficulties – anything from a sudden job loss to an unexpected large expense. The wisdom of this advice has been borne out as Canadian households have weathered the COVID-19 pandemic.
A general rule of thumb is to have enough money to cover between three and six months’ worth of expenses. The right amount for you and your family will depend on your personal circumstances. If your household has only one income, then you are more susceptible to the risk of losing that income. If some of your expenses are flexible and you could cut back on your spending easily, you may have more leeway.
Where to keep it?
You’ll want to keep these emergency funds in highly liquid investments – meaning that you can have access to the funds quickly and easily. Options to consider include High-Interest Savings Accounts, cashable Guaranteed Investment Certificates (GICs) or Money Market mutual funds.
Can you borrow?
In recent years, an alternative idea has been to think of your Home Equity Line of Credit (HELOC) as a kind of emergency fund, as you may have access to the equivalent of three to six months of living expenses by borrowing from it. This is a riskier strategy, as your HELOC agreement may allow the lender to alter the terms and the interest of the loan at their discretion. Many HELOCs also allow the lender to ask for full repayment on demand – an unlikely, but possible, scenario. Keep in mind, too, that you’re adding to your overall debt burden at a time of financial stress.
Don’t let the “six months of expenses” target dissuade you from getting started on building your fund. Any amount of savings could help you get over a difficult patch. A little regular saving now could be a big help when you really need it.
Talk to your advisor today about the savings strategies that are right for you and your family.