Dear 20-somethings,
Life is unexpected. Things happen every day that we don’t expect to happen. A car accident on our route to work making us late for the day. A family member passing away. A car breaking down and needing a fix-up. Situations like this can be very stressful, especially when money is involved. We all know stress isn’t good for us, yet we continually feel this way. One of the biggest causes of stress in life is money. But why should it be?
An emergency fund is simply a pool of money saved away usually in a savings account that can be easily accessed in case of an unexpected situation that requires it. The main reason that everyone should have one is in case of job loss, and with this recession still going on, you never know if your job is actually guaranteed.
However, an emergency fund can be used for many other things as well. It would be kind of silly to leave money in a savings account specifically for job loss, and then it never happens. I am personally slowly building mine up, and I’ve already had to dig into it once to replace my entire windshield after a massive crack went down the middle of it.
How big should an emergency fund be?
This is for you to decide, but I recommend having about 3-6 months worth of your current net pay in there. A good sized emergency fund for anyone would be around $10,000. While this does sound like a lot, take a good look at what you’re currently spending money on. Food, transportation, maybe a mortgage. It all adds up. So if you lose your job, you want enough funds in this account to live comfortably for a few months until you’re hopefully able to get a new job and regular pay again.
I feel like $10,000 is also a good enough size to cover any sort of unexpected expense (ruling out medical). Car repairs? No problem. Your car is so badly damaged you can’t drive it anymore and you need a new vehicle? No problem, just search the internet for a used car for around $6,000. You spent too much money this weekend on drinks with your friends and your rent payment is due but you don’t get paid until next week? No problem, pull a bit out of the EF. That’s what it’s for.
Where should I keep my emergency fund?
I personally bank with one of the “Big Five” Canadian banks. My chequing, savings, stock trading accounts, Visa, and RRSP is all at one institution. However, I keep my Emergency Fund in an ING Direct account. For you Americans, this is our Canadian version of ING. My biggest reason for opening an account with an online-only bank is so that I don’t see this money that much. I have an automatic transfer set-up where ING pulls $50 each payday from my main account. When I log onto my online banking with my main institution, I see everything I mentioned above, except the money that’s sitting in my EF. Since a debit card is not linked to my online account, I can’t go blowing my Emergency Fund money whenever I want. Sometimes I even forget I have money sitting there, and when I go to check it’s a nice relief knowing I have it.
I also wanted a savings account that offered one of the highest interest rates, but was still liquid, and since most banks only offer about 0.6% at the highest, that just wasn’t going to cut it. ING Direct offers a generic savings account at 1.5% which is probably the best you’re going to get since the TFSA’s at the main banks are creeping down to the 1% mark now.
This doesn’t mean that you have to go with an online bank though. I can see how some people are uneasy with that idea. I would highly recommend opening a savings account then with a bank you don’t bank with. For example, if you live in the States and all of your accounts are at Bank of America, then keep your emergency fund with Wells Fargo. That way you won’t see your money all the time, but you have that peace of mind knowing it’s still easily accessible in an emergency situation.
Why can’t this money just go into my retirement savings? Or just use a credit card for emergencies?
Unfortunately, you will get taxed pretty good by the government if you withdraw from your retirement savings before you are retired. This defeats the purpose of getting tax benefits now because you’re contributing to your retirement.
I know of a few people who use credit cards for emergencies, but chances are that you don’t have that money saved up somewhere. And now you are paying around 20% interest on the emergency charged to the card until you can completely pay it off. Isn’t it better knowing that you have money saved up to use at a moment’s notice and you won’t have to pay extra money on top of it? It’s a good feeling.
My suggestion to you is to start building one up if you haven’t already. You can open so many savings accounts nowadays and not pay monthly fees to have them since most savings accounts are free. If you have one specifically for a down payment on a house (another one I’ll be starting to work on soon), and one specifically for a new car, and one specifically for travel, why not open another one for emergencies? I’m sure if something unexpected ever does come up, you will thank yourself at that time. I know I sure did when my windshield was getting replaced. The company offered a much lower price if I was able to pay with cash instead of a credit card. A lower price, AND no interest paid? Sounds good to me!
We can’t always prepare for everything, but we can at least try. Good luck with your savings!
Kayla
PS. If you are a Canadian interested in opening an ING Direct account after I’ve clearly raved the shit out of it, if you use my Orange Key: 36066660S1 while going through the opening process, you will get a free $25 in your account. I’m not forcing you to do this, I’m just saying. Wouldn’t you like 5 free coffees? Cheryl? Anyone?
I can’t tell you the number of times my EF has saved me in stressful times (well okay it’s been 6 times so far). I’m so thankful I have it in place, it makes life and emergencies so much more bearable.
One thing that I guess is different in Canada than US is that we CAN use our retirement accounts towards our emergency funds. Roth IRA’s can be used for a back-up since all the contributions can be taken out tax free and penalty free.
The earnings will be taxed if you take it all out, but you still won’t have to pay the 10% tax penalty. (And yes, before anyone asks – I’m a Tax Specialist and I know this for a fact. At least before they change the rules again
Lol)
I’ve never been sure of how those work in the States. Here in Canada the government automatically takes 10%-20% I think of whatever amount you withdraw, even if it’s not the whole amount. It’s crazy. But gives me more motivation to have an EF since I can’t withdraw from the RSP, nor do I want to, not even for a downpayment on a house, but that’s just my preference.
Oh wow, yeah. I don’t take money out of my retirement either, like you I want to keep it separate. Savings accounts are for EF and RSP/IRA are for retirement and I think it’s a good idea to keep it like that. Great post btw.
WHY DO YOU KNOW ALL THIS STUFF. WHY AM I PAYING TD $10 EVERY MONTH! WHERE IS ALL MY MONEY GOING! WHY DON’T YOU LIVE IN TORONTO SO I CAN HARASS AND YOU TELL ME WHERE MY MONEY GOES. WHY IS THIS ALL IN CAPS!
I have a $2 emergency fund. I’m such a sad adult. Guess I’ll add $100 to it. Bah!Im not yelling at you, I swear. It’s just a caps kinda day.
I love you. <3 Come to Calgary, it's 100x better.
PS. It's possible to waive that $10 fee in your account. Just keep $2,500 in there at all times. Easier said than done, I know.
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