Keeping An Emergency Fund
It's a fact of life. Everything's chugging along perfectly and then disaster strikes.
If you're living paycheque to paycheque, a flat tire, a broken air conditioner, or emergency dental work can put you into unexpected debt.
If you suddenly lost your job, would you be able to cover your monthly fixed expenses until you got back on your feet?
Most people advocate having 6 months worth of fixed expenses in cash as an emergency fund. This is because the average amount of time it takes someone to get a new job after losing their old one is 6 months. Don't tell that to some of my wife's friends, though. They are still looking.
Let's assume your monthly mortgage is $1,750, your family eats for $750 a month, your utilities (hydro, gas, water) cost about $300 a month, and your insurance (auto, home, life, etc.) comes in at $300 a month. Already, that's $3,100. Throw in a few extras like gasoline for the car, Internet fees, property taxes and essential hygiene products, let's round this off to $3,500 of monthly expenses.
If this household were to keep 6 months worth of expenses in cash as an emergency fund, they'd have $21,000 sitting around earning a measly 1% interest*. What the heck? Who's advocating people to lose their money to inflation?
Not the Loonie IT Guy!
While everyone's situation is different, wifey and I are comfortable living on the edge! At least compared to the people who want you to hold onto 6 months worth of expenses in cash.
First off, we have about $2,500 in cash in various chequings and savings accounts. Scotiabank has an account that requires us to have $1,000 in it to avoid bank fees. Fine. Last time I checked, the fees are $3/month. I'm not sure as the chequing account wifey and I have with Scotiabank is no longer offered so I cannot glean the fine print on their website. We hold about $1,500 in this account. This is to avoid banking fees if Scotiabank decides to increase the minimum balance required without informing me or wifey first**. The other $1,000 is spread around an assortment of free online banking accounts. If we need money right away, we can access more money immediately instead of having to wait a couple of days or a week for some arbitrary maximum withdrawal balance to reset.
In addition to money spread around various bank accounts, we also have cash at home locked up in a safe. I know we have at least $1,000 in the safe. Sure it's losing to inflation by sitting there, but for those "I need cash right now" emergencies, the money is there.
In total, that's $3,500! Whoot! While it's enough for our fictional family, it's not enough for one month's of our total monthly expenses. This is only true if both wifey and I lost our jobs. If only one of us were to lose our jobs, this money would last more than a month. We would also need to factor in the lower expenses. No more bus passes. No more daily commutes to work. We would also stop buying wants and focus only on needs.
I know what you're thinking. There's no way $3,500 would last 6 months! You're right! It won't.
As I mentioned in previous posts, our fall back is wifey's TD TFSA e-series mutual fund account. Currently, it has at least $5,000. If things got a little tight, we would sell some of these mutual funds. As there are no fees to buy or sell (unless you bought some funds within the last 90 days), we would sell these first. Until then, this money should continue to grow. Even if the market crashed and dropped 30% overnight, there would still be at least $3,500 available. Wow! Pretty neat how this number matched the fixed expenses of our fictional family! Purely accidental.
Since we're diversified with the e-series mutual funds, a 30% drop in the stock markets overnight will not translate directly to a 30% drop in the value of the portfolio. This should buy us an extra 2-3 months if we ever need this money. If it's years from now before we need the money, there's a chance the account will contain more than $5,000.
Okay, let's say for the sake of arguing, that we've exhausted our emergency cash and emptied the TD e-series account. What then?
Well, wifey and I also have ETFs to sell at Questrade. Selling ETFs at Questrade comes with a cost between $4.99 and $9.99 depending on the number of ETFs we sell. If we both lost our jobs and we continued to spend money at our current pace, we have enough money in ETFs to cover 8 to 9 months. Of course, if both of us lost our jobs, that means lower expenses and reduced spending. In fact, taking into account the reduced expenses, I estimate we have at least a year of expenses in ETFs alone. If markets are down 30%, then maybe we have 9 to 10 months.
Putting all this together, our money should last us at least one year in the worst case scenario. We may have 18 months of expenses if we reduced our spending. Hopefully, one or both of us could line up a new job in 18 months.
Now, having an emergency fund saved up is pointless if your definition of emergency is a little loosey goosey.
Unexpected root canal? Yes, that's an emergency.
60% off sale at H&M? No, that's not an emergency.
Broken furnace in the middle of winter? Yes, that's an emergency.
Last minute seat sale at Expedia? No, that's not an emergency.
Played video games too much and caused a video card failure? Hmmm... that's debatable.
What? I'm the Loonie IT Guy.
*Yes, I'm aware that People's Trust has a TFSA HISA that offers 3% interest. However, in Ontario, that just matches the 3% inflation number from June and barely beats the 2.1% in July.
**TD Bank did this to us back in 2011. A saw a bank fee of $4.95 and was wondering what the charge was for. After digging through their website (at least 15 minutes of digging), I found that they raised their minimums from $1,000 to $1,500. Suffice it to say, we weren't notified. The next day, wifey and I marched to the nearest branch and closed that account. Haven't regretted it since.