Your Emergency Fund is actually freedom (and how much you actually need).Mar 02, 2023
Look I get it, saving for an emergency fund has to be the most boring, most unsatisfying thing you can actually do with your money!
I'd much rather be investing and actually seeing the money grow. Or taking an awesome trip. Rather than allowing money to stagnate away in a bank account. 😑
But SHIT HAPPENS in life.
We all have our own battle stories of jobs gone wrong. Relationships imploding. Illness. And we can't predict when these things are going to happen.
But let me give you a slightly different spin on the emergency fund and why every WOMEN needs one.
I like to think of emergency funds as partially for the obvious emergencies as described above, and partially as "FU money" if I need to pivot out of something fast.
Like leaving a toxic job or a disrespectful boss (yup been there and wish I left earlier!). Or leaving an abusive or destructive relationship (yup been there too...and wish I'd left just a little earlier than I did). Or taking a mental health leave without all the paperwork 🧘🏻♀️ Or managing an illness 🤒.
Or....deciding it's time to finally step into doing that thing you've been dreaming of doing, but haven't started....🌟
Whatever the reason, your emergency fund gives you flexibility to exit some situation in your life fast, if needed, and still be able to keep the lights on. This is ultimate freedom my friends! Living life on your terms. Not being trapped by anyone or anything.
They are not a one-size-fits-all or a predetermined amount. A well funded emergency fund should be approximately 3 to 6 months of basic expenses. Basic expenses include all of the necessities to live – food, rent/mortgage, transportation, utilities, healthcare.
Here are some factors to consider when deciding where on the range you sit:
- How long you've been in your job? You are always entitled to severance when you are severed from a job, unless you are fired for cause. In Canada, the minimum requirement is one week's pay for each year of service, and that is just the minimum. Therefore if you've been in your job for several years, this could reduce the amount of emergency fund that you need.
- How many dependants rely on your income? The more mouths you are feeding, the more you need.
- Are you a dual income family? This could reduce the amount needed since the likelihood that both spouses lose their jobs at the same time is pretty slim. Therefore one spouse would still be able to cover a portion of the monthly expenses.
- Do you financially support your parents or other family members? More demands on your income would increase the amount.
- The amount of loan obligations you have (student loans, car loans, mortgages etc). You don't want to be missing debt obligations, this can negatively impact your credit score and your ability to get credit for several years. It will also cost you a lot more in penalties and interest.
- The general job market and specifically the job market you are in. How quickly can you pivot? Is your profession in high demand?
- If you have passive income (like real estate), or a side hustle/second job that you could ramp up, this could decrease what is needed as well. Instead of reinvesting this income, you could use it to offset your monthly expenses until you land your next job.
As you can see, there is no scenario that is the same. There is many factors to consider when determining the amount that is just right for you.
I always recommend that these funds are held in a high-interest savings account. But be careful. High-interest savings account don’t pay interest that is higher than inflation, therefore it’s important that we don’t hold too much cash aside for our emergency fund.
Leaving too much cash sitting (as in, not invested) is actually losing you money every year because the value of this money is not outpacing inflation and therefore it has less “buying power” for every extra year it sits. We need every extra dollar we have to be working, once the emergency fund is fully funded, so that it can grow for the future.
I encourage you to review the relevance of your emergency fund on an annual basis. Remember, our financial lives and circumstances are changing constantly. We change jobs. Get married. Get divorced. Have dependants. Pay off loans. Increase our obligations. Change our mortgage payments....you get the idea. Having a review of this and adjusting it up or down to meet our current reality is optimal for ensuring we are adequately covered, and not leaving any money sitting idle for no reason.
Here's to fully funded emergency funds and hopefully never needing them 🥂
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Much love, gratitude and money xx