Browsing Tag

emergency fund

General

What Is An Emergency Fund?

do you have an emergency fundHave you ever heard anybody tell you that they have just built their emergency fund? If you have, then did you ever ask them what an emergency fund actually is? I ask this because most people that I talk with have no clue what an emergency fund is or why it is important to their financial future.

What you need to know is that an emergency fund is where you save money for emergencies only. For example, losing your job would be considered an emergency. This is also the reason why an emergency fund should be at least 6 months of your total monthly expenses. Now, I know that saving this much money could be rather difficult for you but the nice thing about having it is that it will make the rest of your life that much easier. Trust me, everybody that has a 6 month emergency fund is stress free and on their way to a successful financial future.

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Money Saving Tips

How Are You Using Your Emergency Fund?

We’ve all heard about the importance of having an emergency fund and many Canadians have them nowadays, however, it appears that many Canadians aren’t using them for their intended purpose.  Rather than setting aside the funds for true emergencies, many folks are using these funds for day-to-day expenses and completely defeating the purpose altogether.

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Money Saving Tips

Your RRSP Is Not Your Emergency Fund

As I have written before, it is important for all of us to have some funds set aside in case of emergency.  If your vehicle breaks down or you find yourself out of work for a while, you do not want to have to use your retirement savings.  There are key reasons why you should not even consider your RRSP as your emergency funds.

First, you get penalized for withdrawing.  You pay withholding tax to the government when you first make your withdrawal.

Second, you have to pay more tax at the end of the year on the amount you withdraw, depending upon your income tax bracket.

Third, there are other negative impacts as well, including the fact that you lose that RRSP contribution room permanently.  So as you can see withdrawing from your RRSP is expensive.

To prevent ever having to make an RRSP withdrawal before retirement, consider putting some money aside every payday and using either a Tax Free Savings Account or even just a regular savings account that still pays you some interest.  This way you have the flexibility to make RRSP contributions with excess savings before the deadline without putting you in the position of touching your RRSP prematurely.  (Build your emergency funds until you have three to six months of living expenses and then any money above that can be used for your RRSP in the event that nothing comes up throughout the year.)

Before putting money into your RRSP, make a mental note that this money no longer exists to you until you retire.  It is not back up savings.  Don’t even include your RRSP balance when you calculate how much money you have.  It’s best if you forget about it, because there is no point in contributing to your RRSP if you intend to use it as emergency funds.  It just doesn’t make financial sense.

Budgeting

Emergency Fund – How Much Is Enough?

Most people are familiar with Suze Orman’s advice about saving up 8 months worth of living expenses as an emergency fund.  It seems like an awful lot of money, but I can definitely see her point.  Especially in this troubled economy when it’s possible to lose your job and it’s better to have a cushion of money to keep you going while you are looking for another one.  But, when the economy is at its best, do we really need 8 months worth? And if not, how much is enough?

I think it should be a personal choice.  You know what you can comfortably live on.  (If you don’t I would recommend making a budget so you can track how much you spend.) It definitely is a good idea to have some cash on hand in the event of a roof leak or an emergency root canal procedure.  But if an amazing investment opportunity comes your way that is too good to pass up, you may decide to forfeit part of your emergency fund.  That’s okay, as long as you have something else to rely on such as a low interest credit line.  You always want to make sure that you have something to fall back on that won’t charge high interest rates (i.e. you don’t want to have to rely on credit cards.)

If you are unsure about how much you should be saving, you might want to ask yourself this question:  If the worst possible scenario happened to me right this minute, how much money would I need to keep my family going?  No one can really tell you the perfect amount to have saved up for a rainy day.  The point is that it’s important to always have some tucked away.