Creating An Emergency Fund

by Tax Guy - Burlington Accountant on May 16, 2008 Print This Post Print This Post

Things just happen to all of us and many times it costs us.

If you don’t have an emergency savings account ready to cover three to six months of your basic living expenses can spell disaster for the best laid financial plan.  However, you can prepare for the unexpected by setting up a savings account to get you through unexpected financial problems.

An emergency fund is a pool of money stashed away in a savings account or other low risk investment to be used only in case of emergency.  It is not intended to be used for big ticket purchases or to finance that vacation you’ve been dreaming about.  The emergency fund is just for emergencies.

How Much Should Be Saved In The Emergency Savings Account?

The general rule of thumb tossed around is that three to six months of living expenses is what you need to put away into a savings account.  But it is important to consider your own personal situation.  Some things you can consider are:

Your Risks & Responsibilities

If you have family responsibilities you probably need to have a larger pool of emergency funds saved than a single person.  If you have a family, you need to ensure they have shelter, food, and healthcare.

Consider the stability of your job and how long you would be out of work should you unexpectedly lose your job.

If you were suddenly disabled, do you have adequate insurance?  You emergency fund can get you by until your insurance kicks in.

Your Expenses

How much do you need in order to provide the basics for a period of time?  As mentioned above you need to have money saved to cover your housing, groceries, utilities, insurance, and child care expenses.  Also consider how much you would need for other unexpected costs that crop up that cannot be avoided or deferred.

How To Save Your Emergency Savings

You may be asking yourself where you get the money now to put away for your emergency savings?  Well you have to plan for it and there are a couple of options available to help you get started now to establish your emergency fund savings:

  • Put 5% to 10% of every pay check into a savings account until you have enough saved.  If you are short on cash now you can put away less, but you are still on your way to establishing your emergency savings.
  • Obtain a line of credit to substitute as your emergency fund now and don’t use it for anything.  The line of credit can be drawn on during a crisis and if you don’t have adequate emergency savings available.  Also it is much easier to obtain a line of credit when you really don’t need one (that is you have a job!).

Tip:  Since lines of credit charge interest, you should use your cash resources first.

Where To Put Your Emergency Funds

Your emergency savings needs to be liquid and readily available but no so available that you are tempted to use the funds for everyday expenses.  Savings rates and investment options also need to be considered.  Checking accounts, savings accounts, money market accounts, certificates of deposit, treasury bills and short-term bonds are all good places to store your emergency savings.

Checking accounts are easily accessible through an ATM or a check but may have minimums, fees, and may pay little if any interest.

Savings accounts typically have low or no minimums and you may be able to find premium rate accounts although the returns are less than other forms of savings.

If you are looking for a premium rate savings account or a low fee checking account, ING DIRECT has the Orange Savings account that offers a premium interest rate, no minimums, no fees, and 24 hour access to your money.  Of course you can use whomever you like and there are many other great banks out there with similar accounts, but I’ve used ING DIRECT and have been happy.

Money market accounts are liquid and accessible but you m ay incur fees if the balance drops below the minimum although the savings interest rates may be somewhat higher.

Certificates of deposit are safe and offer higher rates than savings accounts but your money is locked in for a term and there may be penalties for early withdrawal.

Treasury bills and government notes are exempt from state and local taxes but you might be able to get a better deal on CD’s if you shop around.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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