Having a family is a great experience and you’d do anything to protect yours, right?
You might have life insurance, and an RESP for your children, but what happens if you lose your job? This can be a major worry for anyone. For us, it’s even more of a concern since we are living on a single income as my wife stays home to look after our son.
There are many instances when an emergency fund is helpful. We also treat is as insurance against any unexpected expenses such as major car repairs or paying an insurance deductible.
How much should you keep in your emergency fund?
People save everything from one month to a couple years’ of income. How much should you have? I wouldn’t worry about that as long as you just get started. $1,000 is a good goal to begin with, then aim to have three months of average expenses saved up. The reason we chose to plan for expenses, not income, is because if I suddenly lost my job we could go into survival mode by stopping all savings and just paying for the must-have expenses.
When we decided to set up an emergency fund, we figured it might as well earn some money in a tax-efficient way since hopefully it just sits there and doesn’t need to be used very often. Setting up a high-interest savings account or GIC in a TFSA is a great way to do this. Once it’s set up, just put some money into it automatically each month.
While I hope you’ll never have to use it, having an emergency fund will protect your family from any financial catastrophes and give you peace of mind.
Tom Drake is the owner and head writer behind Canadian Finance Blog and also works as a financial analyst for a major retailer. Tom and his wife Amanda welcomed their beautiful baby boy Christian in October of 2009. To read more of Tom’s posts, subscribe to Canadian Finance Blog’s RSS feed and follow @CanadianFinance on Twitter.