Our summer of bad luck started when our washing machine broke. Then, two weeks later, our dishwasher died. Both appliances needed to be replaced. Then I had to have an emergency root canal our dental plan didn’t cover. In all, we ended up having to shell out over $3,000 in unplanned expenses.
The only good thing was that we actually had enough money for everything saved in an emergency fund – a pool of cash we had set aside just for tough times. Having that fund meant we could quickly deal with our problems without worrying about going into debt.
To me, an emergency fund is essential – if you lose your job or are unable to work, that extra money can help you make ends meet without having to go into debt or dip into your retirement savings.
So how much do you need to put aside?
Experts say you should have enough saved to cover your basic expenses for at least three to four months – longer if possible. And if you have an old house (like we do), you might want to kick in a bit more for emergency repairs.
A couple of tips for building your own emergency fund:
First, treat your emergency fund savings like a bill that you have to pay every month. Commit to saving a set amount (say, $150) every month and then pay into the account — you can even set up an automatic transfer every month to get it out of your account before you can spend it.
Second, make sure you keep it out of easy reach, in a savings account at another bank or even in a tax-free savings account (TFSA). Our TSFAs are basically our emergency funds — we can’t get to the money without having to jump through a few hoops, which is exactly how we want it.
If you do end up going the TFSA route, however, think about playing it safe on the investment front to make sure the money is there when you need it — it’s called your risk profile and you can find out about yours by taking this online quiz.