Three emergency fund myths

Stash away six months’ worth of essential expenses for emergencies

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Close-up of piggy bank in shopping trolley
I know some spurts say to have six months’ income saved up, but why? You can cut all your non-essential expenses if the crap hits the fan, right? Besides, getting people to save even six months’ worth of essential expenses is a tough haul. They’re always coming up with “great reasons” to not save!

Myth #1: I have enough insurance

While you may have enough property insurance, life insurance and disability insurance to see you and your family through those long-term problems, the short-term kinks in your life can kill your financial plan. It takes time to collect benefits. Having an emergency fund can mean the difference between hanging on and falling into a debt hole. As for thinking all emergencies will be covered by insurance, perhaps not. Think divorce. Think kids getting sick so you have to take time off work. Think a death in the family.

Myth #2: I’ll get EI if I lose my job

Maybe that’s true. But do you know how much you’ll collect? The maximum EI benefit is a tad short of most people’s expectations. And what if your emergency isn’t job loss, then what?

Myth #3: I have debt so I should pay that off first

While in a perfect world focusing on debt repayment means more interest savings, we don’t live in a perfect world. And since people always manage to find a good reason not to save, if you don’t start now you may be one of those people who never starts.

If you bought that sales pitch that a line of credit (or any credit) is an emergency fund, you was fooled! Credit is debt waiting to happen and debt can be an emergency of its own. Sure, that line may see you through until you get another job. But then you’ll have to deal with getting that sucker paid off.

Will that be your next excuse for not saving an emergency fund?

3 comments on “Three emergency fund myths

  1. I disagree somewhat with your third point. Paying down debt is generally more important than building savings, especially when that debt is as easily accessible as a line of credit. If you don't have a savings, a line of credit should be viewed as an acceptable risk mitigation strategy for the discrete period of time it takes you to get out of debt and begin building your savings.

    Besides, in an emergency, the last thing I'd want it to be on the hook to owing somebody else interest before I can even get started to climbing out of the emergency.

    Reply

    • I totally agree, MIke.

      Reply

  2. There's also the question about having a large amount of money sitting in an account, doing nothing but depreciating. I think a better approach is to invest it in a TFSA and let that double as an emergency fund, as there is no penalty for withdrawal, and you give yourself a chance to earn a decent return.

    Reply

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