Why I Have An Emergency Fund

by Mike Holman

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I was reading an interesting forum thread recently about emergency funds. Some people are for them, others are not. Three years ago, I went from being a firm non-believer in emergency funds (if you have debt) to having an emergency fund myself, even though I still have debts.

I’m well aware that it is not financially logical for someone like me to have an emergency fund, but I like to have one anyway.

Why I didn’t have an emergency fund before

  • I had long term debt (mortgage) - This means that the “cash pile insurance fee“, will go on indefinitely. If there is a 2.5% spread between the mortgage rate and the interest earned on the emergency fund, it will be an annual cost for at least 10 years or more. That’s a significant amount of money.
  • No TFSA – Prior to 2009, any interest earned on the emergency fund was taxed at over 40% marginal tax rate. This meant that the “cash pile insurance fee” was even larger – maybe 3% or more, which was unacceptable to me.
  • HELOC (Home equity line of credit) - Contrary to what some fear mongers say, banks won’t pull your HELOC if your finances are in decent shape. I’ve known lots of people who have divorced, been laid off etc and nobody has ever lost any credit.

Why I now have an emergency fund

  • Layoffs – About three years ago, there were several rounds of layoffs at my company. Screw the math – having several months worth of expenses in the bank makes those days a lot easier to handle.
  • TFSA – Interest earned in my TFSA emergency fund is tax-sheltered. This isn’t a huge benefit with the current low interest rates, but it helps.
  • Short term mortgage – My long term debt has been turned in to short-term debt. Whatever “cash pile fee” I have to pay, will disappear next year when my mortgage is paid off.
  • Wife – My wife has been out of the workforce for six years – it is getting more and more unlikely that she will ever work full time at the salary she used to. I think we are a single income family, and having an emergency fund helps psychologically with that as well.

Bottom line is that there is no one right answer when it comes to emergency funds and it’s not just about the math.

Do you have an emergency fund? Are they a waste of money?

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{ 12 comments… read them below or add one }

1 Sustainable PF

We need to do better with organizing our emergency funds. We don’t actively work to keep an emergency fund but we always seem to have about 3 months expenses in fluid accounts. Fluid, but not optimized. We need to get our personal financial plan in full gear and get some of this money organized.

2 Canadian Dream

I personally don’t have a dedicated emergency fund anymore. I stopped worrying about it when I realized my average savings monthly cash flow was in excess of my insurance deductible. The other reason I let it go was I get enough cash from other income sources that I really only need a minimum sized one to deal with being laid off for years at a time from my day job. I decided to use a line of credit instead since my investments can cover the interest payments forever.

My three cents,
Tim

3 Echo

I think an emergency fund is a waste of money (for me), but I can see why people have one. Peace of mind is hard to measure and people seem to be always willing to pay a premium in order to sleep well at night.

4 Slacker

If one feels rock solid about one’s income source (union jobs), then I can see why they don’t have a emergency fund.

But for my own industry, it’s somewhat cyclical, and layoffs do happen once in a while. So I do have one. Besides, I don’t have a lot of expenses, so having an emergency fund doesn’t cost me a lot.

5 Lyne

I have an emergency fund. I used to think it wasn’t necessary, then I learned I was wrong. I’m single and live alone. I work for the federal government so you think I’d be all set, right? Wrong. I got ill last year, and the long term disability insurance doesn’t kick in for 13 weeks. You’re supposed to use your sick days before then, but I’ve been using them as I get them because of the same health issue. So I had to get EI for a while and that is not much. Also, even though I did all my paperwork on time, there were some delays on the disability insurance company side (including an employee leaving) so it took more than 4 months to get my first cheque.

Then, I had to pay for some treatments not yet approved by Health Canada (even though they are approved by FDA in the USA and the equivalent in the U.K.) so those were not covered by the province or my private insurance. Two of those at 1000$ each… Not counting my regular meds, thankfully covered at 80% by my insurance, but that’s still a couple of hundreds per month for me.

So that’s why I keep an emergency fund now.

6 Mike Holman

@SPF – I’m the same way. Too much cash in our bank accounts. It is easier than trying to have the exact correct amount.

@Cdn Dream – Sounds like you don’t need an EF!

@Echo – Agreed. Given that I could pay off my mortgage with my EF and have a lot left over, it doesn’t make financial sense for me to have an EF. But, I’m keeping it anyway. :)

@Slacker – Good point. The size of the EF (which could be zero) has to determined by your particular scenario.

@Lyne – Good lesson!

7 My Own Advisor

I think an emergency fund is a necessity for us. I’ll be writing a post sometime soon about that. Peace of mind, just like financial decisions, are not the same for everyone. Your response to Slacker was perfect.

Nice post Mike. Another one in my weekly roundup – Labour Day Edition coming soon.

8 Emily

We have an emergency fund, which is currently very small but that we wish to grow into 3 months savings. We have a few reasons – we are a one income family, we don’t like using credit, and in our city employment has been a bit shakey. There are more but those are some big ones. Also, there’s a huge peace-of-mind factor for me too.

9 Preet

I may sound like a broken record, but personal finance is rarely about being mathematically right. It’s 90% psychology and 8% math.

10 Mike Holman

@MOA – Thanks. Looking forward to your article.

@Emily – Those sound like good reasons to me.

@Preet – Haha – nice one. :)

11 Wendy

Agree with you, I didn’t have a permanent full time job for 3.5 years. That $20K kept me going during that time. My salary over that 3.5 yr period dropped to half. Without it, I would be in some serious debt now. Instead, I have peace of mind. I’m now rebuilding that nest egg in case the rainy day comes again.

12 Mike Holman

@Wendy – Makes sense to me!

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