{"id":397,"date":"2015-12-15T09:13:26","date_gmt":"2015-12-15T17:13:26","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=397"},"modified":"2015-12-15T09:13:26","modified_gmt":"2015-12-15T17:13:26","slug":"emergency-fund-a-good-idea-in-all-situations","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/emergency-fund-a-good-idea-in-all-situations\/","title":{"rendered":"Emergency Fund – a good idea in all situations"},"content":{"rendered":"

\"piggy-bank-2-1241226-639x651\"<\/a><\/p>\n

Over the weekend I was pleased to see an article on Emergency Funds by Rob Carrick from the Globe and Mail – see his article here<\/a>. \u00a0We have been talking a lot about Emergency Funds recently and specifically how to better convince people of their importance. \u00a0In our experience, not a lot of families or individuals\u00a0have an emergency fund nor are particularly interested in the subject. \u00a0If they have the funds set aside it’s usually because they have it earmarked for something specific or just haven’t got around to investing it yet.<\/p>\n

I found it particularly interesting to read some of the online comments in response to Rob’s article. \u00a0Some asked how you can recommend savers try to accumulate an emergency fund of a few months of living expenses when that might be all they have invested, especially when interest rates are so low. \u00a0While yes, rates on GICs are low, we agree with Rob that it should still be a priority. \u00a0Let’s start with the situation for those who\u00a0don’t have any savings whatsoever – it’s definitely worth foregoing next year’s vacation or other planned discretionary spending items to start an emergency fund (sorry, this is a tough one for the holiday season). If you have nothing at all in reserve and something comes up like a job loss or urgent unexpected spending need, the options available if you have no savings can be very costly. For some that means credit cards, for others loans or lines of credit with higher interest rates, both things that are better left avoided.<\/p>\n

Even if you have plenty of surplus cash, an emergency fund is still a good idea. \u00a0An urgent and unexpected\u00a0need for funds might coincide with a terrible time to sell your other investments (for example a lot of people tend to need their emergency funds at tough economic times which can coincide with market lows) \u00a0or might trigger an unwanted tax event. \u00a0There are\u00a0also psychological benefits to having an emergency fund set aside. \u00a0It will give you confidence to know that when an\u00a0emergency happens you have provided for it and despite the current tough situation, you can take comfort that as a result of being prepared you don’t have to dip into your long term savings. \u00a0In our experience this makes people feel just as good or better than\u00a0trying to get\u00a0as high a return as possible on their overall portfolio.<\/p>\n

In the same way people don’t like to think about life or disability insurance because it raises unpleasant subject matter, so to does the emergency fund. \u00a0The need for it likely means\u00a0something bad is happening so some prefer to ignore the unpleasant subject\u00a0all together.<\/p>\n

For the emergency fund we\u00a0usually recommend three to six months of living expenses – erring towards the high end to the extent your expenses are less discretionary (think mortgage or other loan repayments), your\u00a0employment income is less certain\u00a0and\u00a0your financial situation is less liquid.<\/p>\n

The Globe and Mail website also has a handy reference page for finding which GICs are currently on offer ranked high to low by the one year interest rate offered. \u00a0You can usually find it at the bottom right of the Personal Finance page – click here for the link<\/a>.<\/p>\n

In terms of what type of account to hold your emergency fund in, we’d agree with Rob Carrick to put it in a TFSA but only if you don’t have enough funds to max out your contribution room with\u00a0funds for long term investment purposes. \u00a0The TFSA is a very powerful account for compounding tax-free investment returns over the long run and we recommend prioritizing contribution room in a TFSA for long term investment purposes if you have the funds. \u00a0The tax you’ll save on a GIC by holding it in a TFSA is minimal compared to the tax you’ll save from other higher return assets you might hold in your TFSA. \u00a0In fact it’s a shame the TFSA is called a “Savings” account in the first place. \u00a0Perhaps Tax Free “Investment” Account would better alert investors to its benefits – for more on\u00a0harnessing the power of the\u00a0TFSA account see\u00a0this piece<\/a> from April.<\/p>\n

So again, we don’t like to think about the situations that might necessitate the use of an emergency fund and as a result many choose to\u00a0ignore it\u00a0in the same way they might ignore\u00a0sensible life insurance, however it’s there to protect our families when we need it so is more than worthwhile.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Over the weekend I was pleased to see an article on Emergency Funds by Rob Carrick from the Globe and Mail – see his article here. \u00a0We have been talking a lot about Emergency Funds recently and specifically how to better convince people of their importance. \u00a0In our experience, not a lot of families or […]<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-397","post","type-post","status-publish","format-standard","hentry","category-all-posts"],"_links":{"self":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/397","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/comments?post=397"}],"version-history":[{"count":5,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/397\/revisions"}],"predecessor-version":[{"id":403,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/posts\/397\/revisions\/403"}],"wp:attachment":[{"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/media?parent=397"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/categories?post=397"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chaltenadvisors.ca\/blog\/wp-json\/wp\/v2\/tags?post=397"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}