Why we want a $10,000 emergency fund

A $10,000 emergency fund.  Seems like a pile of money doesn’t it?

Some time ago, Mike Holman wrote an article for Moneyville in the Toronto Star and his emergency fund needs are even larger, $20,000 actually.  $10,000 sounds great but it’s really not that much money.  A few mortgage payments and for some of us, close to half of that money is gone right there.

A fact of life is…life happens and bad things go with it.  Appliances and cars break down.  The furnace conks out.  The air conditioner burns out.  The list goes on.  These realities often require us to fork over significant funds to right the ship.   Maybe I worry too much, then again, maybe I’m just realistic.  What I do know is I like being prepared for the “what ifs” in life not to mention I don’t have very good luck.  I guess that’s the first reason why we want to have a modest emergency fund – it provides us with some piece of mind when our luck does run out.

The second reason why we want $10,000 in our emergency fund – it provides us with financial flexibility.   If, rather, when something goes wrong with my 12 year-old Mazda it’s usually something big.  Gone are the days of simple oil changes every 8,000 km.   A healthy emergency fund in our high-interest savings account allows us to combat any car failure and weather another major expense should it happen at the same time.  My real life example occurred when my car wouldn’t start and we needed to install back-up sump pump for our house before the spring thaw.   Keeping our emergency fund at a modest amount and readily available allows us to have access to cash if we need it.  Having a healthy cushion of cash allows us the freedom to work through our emergencies and keep our needs in check at the same time.

The third reason why we want a modest emergency fund – it keeps us out of debt.   Unlike a line of credit (LOC) these things are not a bottomless pit like some people believe they are.  Credit is just that and with an LOC, you need to pay it back.  LOCs are not savings or assets they are a liability.   In an emergency situation the last thing my wife and I want to do is to add-on more debt.  I’d rather focus on the emergency and deal with that.  I have enough debt to worry about with our mortgage.

The fourth reason why we want our emergency fund – it keeps us in control.   Further to using a LOC as an emergency fund, we’re not in control if we tap into it, the bank is.  The bank determines our borrowing rates and payment criteria.   Rates change as do bank policies and procedures.  I don’t want to be left holding anymore bank debt than absolutely necessary.   Too many strings attached for me and I don’t want to be the bank’s marionette.

The fifth and final reason why we want our emergency fund – we will never be immune to those “what ifs” in life.   As I stated at the beginning of this post, life happens.   No matter how stable our jobs might seem, how good our health may feel, we know we are not immune to the realities of life.   When the proverbial stuff hits the fan, I have no predictive power in knowing how long we’ll be stuck in that crisis.  It could last days.  It could last weeks.  It might last months if we lost our jobs.  Who knows what the future might bring.  We think an emergency is the worst time for us to dive into debt.

Like home, auto or life insurance, creating financial security through a modest emergency fund just makes sense.  Having close to $10,000 for emergencies is a great security blanket that should cover us nicely for the majority of events.  If and when times are uncertain, we’ll take all the extra help and security we can get.

Where are we now?

We don’t have $10,000 in our emergency fund but it’s a longer term goal for us.  We’re saving for it and I’ll provide an update when we get there.

What about you?  Do believe in emergency funds?

If so, what is your magic number for your safety blanket?

39 Responses to "Why we want a $10,000 emergency fund"

  1. You know where I stand but I have a question 🙂

    I can understand having an emergency fund when you don’t have much investments or everything is in an RRSP but what is the difference between and emergency fund and all the savings (including a TFSA)? Let’s say you have $100K invested outside RRSP, do you really still an emergency fund with money not working for you? (lets face it that a high interest account doesn’t really pay anything nowadays) We seem to put a barrier between investments and an emergency fund but does it need to be?

    The amount should also be based on what you may need and where you are in life …

    For those reading, my emergency fund is a LOC or I fund from my investments if bad luck hits

    Reply
    1. Yeah, I know where you stand 🙂

      You raise some good points, but I don’t want to draw on investments, if I can help it, when I need the money most. If I have $100 K invested outside my RRSP, I want that money working for me at all times, in down markets and in good ones. The thing about an emergency is, you don’t know when it’s going to happen.

      You’re right, folks seem to put a barrier between investments and an emergency fund – it’s doesn’t have to be this way – but I like thinking about distinct accounts…keeps me organized.

      Thanks for your comments PIE, always great to read how your mind ticks.

      Reply
  2. I like to have between 4 and 6 months of expenses on hand. Partly because I am self employed and unemployment can happen at any time, without warning.

    But PIE has a point too – if you have access to cash (even if not ideal) then that should reduce your need for emergency cash. I have a fully funded TFSA, a good RRSP, non-registered investments, and an unused HELOC – just in case.

    The only negative to viewing investments as a source of emergency funds is that for some (many?) it might too tempting to withdraw for non-emergency reasons (or the “emergency” winter vacation).

    Reply
    1. PIE definitely has a point. I like how he thinks, but psychologically, I can’t do it yet 🙂

      We have an unused HELOC as well, but in an emergency, I rather not have to worry about paying debt back.

      Thanks for your insight Bill, you seem to have some great financial discipline.

      Reply
  3. I agree that having a large emergency fund is important.

    My partner and I plan to eventually have a $24,000 emergency fund (we will own two properties at this point).

    Why $24,000? It’s enough to ladder 12 x $1,000 GIC’s or like investments (each). Each month, a portion of our emergency fund will be accessible, but we would never plan to need all of it at once (and if we did, then the money would be available within a year).

    I think this allows both the security of an emergency fund but savings in a GIC, TFSA or like investment as The Passive Income Earner points out.

    Reply
    1. Hey Brian,

      I like your thinking… 12 x $1,000 GICs for one year. Never thought of creating a ladder with my EF. You’ve got my thinking now. I was thinking more of a HISA, @ 2% interest or so.

      Reply
  4. I don’t think $10,000 is too much if it gives you the comfort you need to not have to worry about your finances. That is the point of an emergency fund – to provide a financial and psychological cushion. My emergency fund is enough to fully fund my current lifestyle for 3 months, or fund a thriftier version of my lifestyle for as much as 6 months.

    Reply
    1. Absolutely right Earth and Money….a psychological cushion. I’m biased, but I happen to think it’s very practical as well. It’s there when you need it and if you don’t, it’s a safety blanket for you. I suspect $10 K would last us a few months, no other income. I hope I never have to find out 🙂

      Thanks for your comment!

      Reply
  5. I think emergency funds are very important! It definitely provides a cushion to the things that can happen in life. I have a couple years worth of expenses saved up, which I believe is too much since I can be investing it instead. $10K is a nice round number to work with.

    Reply
  6. We have a bigger goal than you by 4 x’s. And we also save separately for cars going kaput, house needing something serious etc. At our ages we can’t bounce back quite so easily as younger people. We have our TFSA’s maxed with hubby’s in investments (not quite so liquid really) and so mine are all in either short term GIC’s or high interest savings. So hopefully in 2 years we’ll have $40,000 in emergency savings. (Hubby is injured, laid off etc are the only emergencies this is for).

    Reply
    1. Wow, you’re prepared. Maxed out your TFSAs? Nice! Mine is done but my wife’s isn’t. The plan is to max hers out over the next couple of years.

      $40,000 in emergency savings is impressive, that will certainly cover you for some time.

      Reply
  7. I agree with the passive income earner; I am lucky enough to be part a defined pension plan, so my focus during my first 5 yrs of employment has been to pay off OSAP. But now that I’m planning and starting an investment portfolio I plan to have a percentage in stock indices, a percentage in bond indices and a percentage in cash (i.e. high interest savings) in a variety or registered and non-registered accounts – that percentage in cash will be applied to emergencies, car repairs, trips, toys etc. I’m a planning oriented person and I put a lot of thought into major purchases, so I don’t feel the need to separate the money into several accounts 🙂

    Reply
    1. Smart stuff Mel, pay off that OSAP. Been there, done that. I also like your call about some %tages in stocks, bonds and cash. That’s well-rounded in my opinion. Keep up the discipline and do check in again when you can!

      Reply
  8. You’d laugh at my emergency fund Mark, depending how I measure it. In terms of a savings account, I have a few hundred dollars at the end of the month. But I do have ready access to my bonds when I need cash.

    If I were in Canada, however, and most of my money (if not all) was in RSPs, I would want an emergency fund of roughly $10,000 as well. Mike’s family situation is different to ours. Mark, if we were in his boat (he has thirteen kids) we’d both likely want $20,000 as well. Sorry Mike, I thought about spreading the rumor, but with the internet being what it is…. you might find yourself coveted by a television program. For the record, Mike has only 11 kids.

    Cheers,
    Andrew

    Reply
    1. @Andrew,

      Ha, I doubt it Andrew! We try and keep a few thousand in our chequing account at all times, and the $10 K would be simply emergency fund.

      I’d rather not sell my bonds if I need cash, although maybe that’s a good strategy as well? Problem is, all my bonds are in my RRSP.

      Mike (Holman’s) family situation is indeed different than ours, when you have a dozen kids, you need security!!! 🙂

      Kidding Mike…and by the way, where is your comment on my site?

      Thanks for your comment Andrew. I’ll be over this week to check out your blog.

      Reply
  9. The Passive Income Earner :
    You know where I stand but I have a question
    I can understand having an emergency fund when you don’t have much investments or everything is in an RRSP but what is the difference between and emergency fund and all the savings (including a TFSA)? Let’s say you have $100K invested outside RRSP, do you really still an emergency fund with money not working for you? (lets face it that a high interest account doesn’t really pay anything nowadays) We seem to put a barrier between investments and an emergency fund but does it need to be?
    The amount should also be based on what you may need and where you are in life …
    For those reading, my emergency fund is a LOC or I fund from my investments if bad luck hits

    I guess the advantage of not having money in investments is that he can’t be forced to sell at an inopportune time, but I see what you’re saying PIE. My gal and I both have pretty stable jobs, and our living costs are very low, so I’m much more comfortable with a small emergency fund (2K or so) and a LOC I could quickly pay off should the need ever arise. That being said, I definitely see the justification for one (especially if you have more monthly payments and drive an older vehicle) and sometimes high interest savings accounts get better returns that over-active investors, or people who like high MER mutual funds, so it’s nothing to sneeze at.

    BTW, hope the vacation went well buddy.

    Reply
  10. I am in my early thirties. I have had an emergency fund…money was always allocated for something or spent. I am slowly building up an emergency fund and hoping to get to $10K as well. It will probably take me several years to get there though. Like you, my car is 10 years old now and I am hoping to hoping to buy a house in the next two years (separate allocation of money). I might also leave my currently company in the next few years (in that case, I won’t buy a house). Once you have a house, stuff will also come up that needs money fast. I guess I am anticipating changes in life so I figure I might as well start saving now.

    Reply
    1. @Simple Rich Living,

      Thanks for your comment! Yeah, once you have a house, I think it’s essential to have an EF. Stuff happens, sometimes when you least expect it, and so having some cash handy is a great thing. If a few things go around our house, that $10 K will disappear quite quickly and I bet the same could be said for most “homemoaners” 🙂

      That said, I hope we never have to use it.

      Reply
  11. That $10,000 could be earning $41.67 every month, or $500 a year. That is the main reason I prefer the line of credit. But you know that, and if your peace of mind is worth $42 per month than I agree with your decision.

    I think that you could break up that 10 grand, and hold $5K in a savings account for really quick cash and then invest the other half with the express purpose of earning a little it is not needed for emergencies. Five thousand should be enough to handle lots of situations and for the others it would be enough to tide you over until you can get the invested portion.

    Reply
  12. I do believe in Emergency Funds. When you first start saving, they seem silly. But after a few years and a few actual emergencies, you start to see why everyone recommends them. We’re close to $10K in ours, but I don’t think that is going to be enough. I have seen some people recommend as much as 6 to 12 months. Now that seems ridiculous.

    Reply
  13. Our current emergency fund is over 15K, not counting the 2K to 4K maintained in our chequings monthly. I like to have lots of cash handy, because in 2004/5 I was hospitalized and on and off work for about an year. The only thing that saved me back then was my emergency money and the small mortgage I had on my condo. I know there are potentially better returns on these funds out there (and riskier too), however the 3.5% we get in our TFSA savings makes it a win-win situation. Finally, keeping some dry powder on the side is always a good thing in case a buying opportunity occurs.

    Great post as usual!

    Reply
  14. 10K, 20K, My wife and I had 40k sitting in our emergency fund, Just in case, and you know what? Last month we needed it. Our roof sprung a leak (after numerous patch jobs) so we decided to replace the whole thing with a steel roof. 18.5K. Then we booked a planned holiday to see my sister get married. 3k. Then a week later my wife’s car died. 5k for a used van. Then 3 days after that, she broke her ankle and had to take 6 weeks off of work.

    An emergency fund is just that, something sitting in cash that can be accessed at any time, without worry about where the market is, or dipping into a LOC

    Reply
  15. @Elemag

    15 K is solid Elemag. Based on what you tell me, I expect nothing less 🙂

    People talk about their investments and TFSA for EFs, but I don’t subscribe to that. My investments are my investments, I want them for the long-haul, not a short-term emergency situation.

    Thanks for checking in!

    Reply
  16. @Poor Student

    There is an opportunity cost, for sure, but you can say that for many investments/savings practices.

    The thing about emergency funds is this: you don’t know when you’ll need it but like insurance, you’ll be so glad you have it when the circumstance presents itself.

    Reply
  17. Depends on the size of the emergency. One strategy could be to have a nice chunk socked away in a long-term CD, for catastrophic emergencies, for example a vehicle replacement. A smaller chunk could be in a regular savings account, for smaller emergencies ( a brake replacement ). The smaller, ready-access savings nut is easier to replace, and could also include a set-aside to cover the CD withdrawal penalty.

    Reply
  18. I have a substantial, secure, low interest LOC (a point over prime) with a $0 balance which I can immediately access online if need be.
    On two previous occasions, I have transferred the balance (for a nominal fee) to a cc which offered 0% interest for 12-15 months and then I saved the equivalent amount in a savings account which earned interest for me. I then paid off that cc debt by the due date.
    If my car dies, I guess I’d look around for a year end model being offered at 0%.
    Everybody is different. IFortunately I have very little credit card debt and pay it off every month so, for me, I just don’t see any need to stockpile $ for an emergency.

    Reply
    1. I know lots of folks that use their LOC for an EF. I think it’s a good move in many cases, it just doesn’t work for us.

      Like you say, everyone is different and has different needs and comfort levels. Ours happens to be $10 K for a rainy day.

      Thanks for your comment!

      Reply

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