The need for an emergency fund is essential and cannot be overemphasized.
This fund should be in very liquid form and can be readily accessible.
So how much should be set aside for emergency living expenses? Financial experts all agree it needs to be a minimum of 3 months’ worth, increasing to as many as 9 months’ worth of living expenses. That is because the last thing you want is to borrow at a high rate (like credit card charges) for living expenses, or draw from long term investments at the wrong time.
Depending on your circumstance and lifestyle, here are some factors to take into consideration when determining how much and for how long the fund should support you –
1) size of your household you are supporting and dependent on you;
2) other cash that’s readily accessible, like money saved in your TFSA (tax free savings account);
3) how much of other sourced income will be coming in, like EI (employment insurance) and short term disability benefits.
Ask yourself –
1) am I in a high risk, vulnerable area of employment where replacement work may be difficult to come by?
2) do I lack other sources of income during this period?
3) do I lack other savings to access during this period?
If the answer is yes to these questions, you will need to consider a larger emergency fund.
My suggestion on how to estimate the fund amount:
– determine your basic monthly living expenses;
– multiply by the number of months you will likely need to access this fund;
– add 10% contingency to the total;
– less any liquid savings you can access;
– this will equal to the fund size you should consider setting aside for your rainy day account.