Size of Emergency fund

George said:

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

Click to expand...

Can we also consider a LOC as an emergency fund?

I don't really include our LOC as part of our emergency fund, since in the case of a true emergency (major illness or job loss), it's quite possible that the lender would either reduce the credit available or mandate payments on the loaned amount.

George said:

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

Click to expand...

I think it really depends on the "type" of income as well. For example a business owner with variable income should have a larger cash reserve than someone working for the government.

We personally have a tendency to build cash reserves. We're comfortable in the $10-$20k cash range.

George said:

I'm curious as to whether this is bigger or smaller than what other people might aim for.

Click to expand...

We keep about 3 months expenses in cash, say between $10K to $20K. I don't consider LOC as an emergency fund. It is hard to say what is the "right" number because it depends on family circumstances. A two-income family has less risk than an one-income family. A two-income family where the spouses work in different fields / sectors may have more/less risk than another family where both work in the same place. For instance, a few years back both of us worked in the private sector. Now, one of us works for the government and so the risk of a job loss is a lot less.

I would say that "enough cash reserves to sleep well at night" would be a good thumb rule.

I know it sounds bad, but I'm not a huge fan of emergency funds.

The reason being that you would normally come out ahead paying off any debt, reducing your mortgage, or investing for a longer time frame.

In a true emergency, using a credit line, or even withdrawing from your RRSPs would work. Any emergency should be temporary and these would provide you with the ability to survive.

All that said, if I did decide to have an emergency fund, I'd only fund a savings account in a TFSA for one year / $5000 and that would be the max.

I consider our LOC our reserve fund as well. I also think that the $2000 min balance we keep to keep our bank fees at $0 could be considered reserve cash.

Canadian Finance said:

I know it sounds bad, but I'm not a huge fan of emergency funds.

Click to expand...

I would agree with you, but it also depends on the circumstances of the individual. I also use my LOC as an emergency fund because I feel that any money set aside could be better used to reduce my current mortgage. Also my wife and I are in different industries, so the risk of both of us losing our jobs is very slim.

I aim for roughly 3 months of expenses in my E fund.

This brings me to a related question. I'm using a dedicated high interest savings account for the E fund. However, I'm wondering whether it would be a good idea, for example, to use a TFSA for the E fund, and invest a portion of the $ into a money market fund for instance.

The rationale is that the interest from the money market fund is higher than that of the savings account, and the tax-free component of the TFSA vehicle of course makes this attractive. I do want to make sure, however, that the $ in the account is liquid.

Has anyone done something like this? Any comments/suggestions/pitfalls?

http://themoneygardener.com/2007/10/defying-cash-emergency-funds.html

I don't feel like the traditional meaning makes sense for us.

I like to keep about $5000.00 in easily accessable funds at all times. These are usually in a combination of short term deposits and high interest accounts. When savings exceed this amount I tend to reinvest the money in longer term investments.

I'm in the 1.5 months range, although recent events have made us get closer to the 3 month range.

We don't have a true emergency fund per se, as I sorta consider it as cash in our portfolio allocation, ready to use it any time now....

DAvid said:

The passive income would cover all our necessary (household) bills, except some food.

Click to expand...

I agree with this point. You'll have to figure in EI benefits, passive income via dividends and in a pinch even the fixed income in your RRSP (if it's a question of survival). There is also the potential to reduce expenses in some situations. For instance, if one of us loses a job, we'd definitely think about pulling the kids out of daycare.

My 3 months estimate is assuming I maintain our current expenses. YMMV.

Line of Credit

With my wife & I being in an extremely stable government jobs with seniority, we use our LOC as an emergency fund. We have the money in savings, but we don't think of it like that.

Our emergency fund is currently 12 000 (we plan to bump it up to 15k over the next year or two). This money is held in a high interest savings account.

We decided that we were comfortable if we had an emergency fund for a year. So we are currently saving up $30k

DAvid said:

Our emergency "fund" includes the following:

all accelerated mortgage payments
6 months + of accumulated sick leave
Banked overtime
Banked Vacation
LTD plan
RRSP
TFSA
investment portfolio
Employment insurance
"Passive" income

Spouses income

The passive income would cover all our necessary (household) bills, except some food.

DAvid

Click to expand...

DAvid, I really like the list that you have provided.

Do you mind me asking, what do you classify as passive income

George said:

Ok, so the usual advice is that an emergency fund should cover around "3-6 months" of expenses. Some people say 3 months' income, others say something else.

What does this mean to you in actual dollar figures?

Personally, for us (two-income family with two young kids), we're aiming for an E-Fund of about $20,000. This would cover 6 months of expenses in case of a major emergency (job loss, major illness etc). I'm curious as to whether this is bigger or smaller than what other people might aim for.

Click to expand...

Hey George, have you think to simply get a line of credit of 20K and never use it unless it would be for your emergency fund? If you think of the odd of using your full 20K as emergency fund during your life, chances are that you would be better off investing that money and make a much better return than the 1.5%-2% in a money market fund.

On the other side, the cost of a line of credit may vary. The cost of interest would probably be around 7%-8%... if you ever use it!

The Financial Blogger said:

Hey George, have you think to simply get a line of credit of 20K and never use it unless it would be for your emergency fund? If you think of the odd of using your full 20K as emergency fund during your life, chances are that you would be better off investing that money and make a much better return than the 1.5%-2% in a money market fund.

On the other side, the cost of a line of credit may vary. The cost of interest would probably be around 7%-8%... if you ever use it!

Click to expand...

I like the idea of a combination of those. A small emergency fund of $1000-2000 to cover insurance deductibles, furnace breakdowns, etc., kept in a high interest savings account. A LOC to be used only to supplement EI, disability, or whatever else, and otherwise kept at a balance of zero.

Once my student LOC is paid off, I'll look into this, but until then, it's a cash only emergency fund.