Why You Need An Emergency Fund

by Tax Guy - Burlington Accountant on July 7, 2009 Print This Post Print This Post

Do you have a pool of cash that is readily available in an emergency? Where would you get funds if you suddenly lost your job, if a natural disaster hit your area, or if there is a death in the family.

An emergency fund is a must have for anyone’s financial plan. It provides you an immediate source of cash that can be used to cover your immediate living expenses for a specific period of time.

What Qualifies As Emergency Funds?

Since you will need to have quick access to funds, your emergency funds must be quickly and easily accessible and you should be able to covert them to quickly cash. Examples of emergency funds include:

  • Cash,
  • Cash in your bank accounts,
  • Canada Savings Bonds,
  • Treasury Bills (AKA T-Bills), and
  • Money market Mutual Funds.

You should also have some cash in your home at all times to cover immediate emergencies such as bank machine outages, power outages, or natural disasters.

How Much Should Be In Your Emergency Fund?

The amount in your emergency fund is a matter of choice although many financial professionals suggest that you have enough on hand to maintain your current lifestyle for 2-3 months. This should be enough to cover you if you were to suddenly lose your job and would provide you some time to apply for employment insurance benefits and look for another job.

What About A Secondary Fund?

A secondary fund is a pool of funds that are similar to an emergency fund except this pool is used to take advantage of sales or other opportunities that may arise. For example, if you have been thinking of installing a new pool liner next year but suddenly come across a 50% off installation deal, you could use this secondary fund to pay for this expense.

A secondary fund is an excellent alternative to a line of credit or credit cards.

Start Small

If you don’t have an emergency fund or find it difficult to save, the key is to start small. Set up a savings account at your bank and make regular deposits to the savings account. Better still, see if your employer can split your paycheque: Part of your pay automatically goes to a savings account and the rest goes to your chequing account for everyday expenses.

You can begin with $10 or $20 per pay or even 5% or 10%. Whatever you choose is O.K. The point is that you are paying yourself first.

Do You Have An Emergency fund?

How much do you have in your fund? Do you have alternative suggestions to share.

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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