Quite often I’m asked how we should prioritize our money, and one of my first responses is to set up an emergency fund. Setting aside 3-6 months worth of expenses should be made a priority because we’ll never really know what will happen in our lives. Putting that much money can be a real struggle for some, but once we have the money saved, it can give us peace of mind.
Recently a pretty big unexpected expense came up in my life, but it never worried me since I had funds set aside already. Since money wasn’t an issue, I was able to focus on the other aspects of my predicament. Having an emergency fund made my decision making a lot easier, but I wondered how others would handle it if they didn’t have any money available?
Every situation is different, but I would imagine when money is a real concern, emotional decisions get made. Some of us might not have a choice and decide to charge the costs to credit, while others may be forced to make a tough decision since they can’t afford it. Neither of these choices is ideal, so it’s not hard to see how important it is to have an emergency fund in place.
Reasons to use your emergency fund
Job loss – Losing our jobs will always be one of our biggest fears since without a job, we won’t get paid. What makes losing our job even more frustrating is that it can happen at anytime, and for any random reason. Having that emergency fund will give us a bit of a cushion while we hunt for a new job.
Medical expenses – Canadians are pretty fortunate to have some of the best healthcare in the world. Not only are trips to the doctor and hospital free, but so are many major medical procedures. However, there are times where we need to pay things out of our own pocket. Some medical expenses could cost thousands of dollars, so it’s best to be prepared just in case.
Travel – Let’s be clear, we should never blow our emergency fund on a vacation, but there are times when we’ll need to use it for travel. A sudden death in the family could force us to take an unexpected trip, and last minute flights tend to cost a small fortune. In these situations we already have so many things on our mind, it’s nice that money isn’t one of them.
Maintenance – It’s always a good idea to budget separately for house and car maintenance, but sometimes a major repair is required, and our reserve funds might not be enough. Dipping into our emergency fund to cover any outstanding costs makes a whole lot more sense than charging it to credit. The tricky thing is knowing what counts as an emergency. A burst pipe counts, but draining our reserve funds for a kitchen renovation is not a smart use of our money.
Emergency funds take time to build so don’t stress out if yours isn’t fully funded yet. The easiest way to build it up fast is to simply budget for it. Put aside $50-100 a month and you should get there in no time. Saving isn’t very sexy, but at least you won’t stress out when it you need to draw on those funds in emergency situations.