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?