*featured image by maitree rimthong
In some of my previous updates and articles, I noted that I was going to primarily be relying on my unsecured line of credit as my emergency fund. Recently, I’ve been reconsidering this. Readers who have been following my networth updates and dividend reports the last few months will know that I recently bought an investment property. Of course, this now means I have a budget to contend with.
In this article, I will outline what an emergency fund is, how I will be getting a return on my emergency fund, as well as how to establish and determine the size of your emergency fund.
Did you know that nearly 40% of Canadians don’t have an emergency fund? Given that I am (and if you’re reading this blog, you likely are also) in a position to invest, one of the last things I want to do is draw on my investments (both the dividends and the principal amount) when an emergency arises.
What is an emergency fund?
The classical definition of an emergency fund is as follows:
An emergency fund is easily accessible money that’s been set aside to be used only in absolute emergencies; such as unexpected yet necessary bills or for every day essentials in the event of job loss or similar.
Given that I’m investing oriented, I’d expand this to include having the funds available to take advantage of significant opportunities in the stock market, should they appear. Significant opportunities in this case means more than a correction (10%) or a bear market (20%). In this case, we’re looking for a crash (+30%). Because how great would it be to just have a pile of money sitting around when there’s great opportunities to pick up great companies at a discount?
Getting a return on Emergency Funds
Losing purchasing power due to inflation is one of the arguments I would hold against having emergency funds. You can invest it in a high interest savings account or GIC – and then HOPE that your interest beats or matches inflation. At this stage, for my own personal emergency fund, I will be leaving it in cash and getting my return through the elimination of banking fees.
Banking Fees
If you have a Canadian chequing account, I’m willing to take a wild guess that you have banking fees. My own chequing account charges $4.95 to $14.95 / month, depending on how many transactions you do. Up to 12 transactions it’s $4.95, after that it jumps up to $14.95. To avoid these fees, I need to keep a minimum of $3000 in my account. This translates to 1.98% to 5.98% annually.
My transactions:
- Employment income
- Credit card payments (usually twice a month, balance paid in full)
- Loan payments (once to twice a month)
- Condo fees (once a month)
- Mortgage payments (once to twice a month, likely once)
- Rental income (once a month)
- Transfers to TFSA/RRSP/Non-registered account (usually twice a month)
Estimated total transactions / month: 10-11
This number is expected to increase as I diversify my income streams and gain some experience as a landlord. Especially since I expect another rental income stream to come online in the fall, along with multiple other income streams. This will easily put me into the over 12 transactions a month category.
My minimum emergency fund amount will be $3000 (up to $4000, come July 1 with fee increases). The numbers will be updated once this comes into effect.
But how much do I really need for my emergency fund?
Emergency Fund Details
Generally speaking, an emergency fund should be around 1 year of expenses. Sound daunting? Yeah, a bit, we can start off simpler by taking a look at monthly expenditures, and using that to help determine our emergency fund size.
Monthly Expenses
Non-negotiable expenses
| Expense | Amount |
| Mortgage | 850 |
| Condo Fee | 550 |
| Utilities (electric, gas, hydro, internet) | 400 |
| Groceries | 400 |
| Gas (car) | 50 |
| Total | 2250 |
Other expenses
| Expense | Amount |
| Gym | 50 |
| Cell phone | 120 |
| Netflix | 15 |
| News | 15 |
| Total | 200 |
I have other expenses (not included in the above), which I’ll be including end of year when I revisit my budget spreadsheets. Right now, though, that means I have roughly $2450 a month in expenses.
To make this goal more achievable, let’s set milestones. We can break down this down into quarters:
| 3 Months | 7350 |
| 6 Months | 14700 |
| 9 Months | 22050 |
| 12 Months | 29400 |
Sound like a lot? Well, it definitely is a decent chunk of change. However, by breaking it down into milestones, we make this a lot more manageable. As I will be balancing my mortgage the next few months, I figure I might as well use that time to also work on establishing my emergency fund and get a return on my money by saving on those bank fees!
