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Planning for an emergency fund

June 10 2017 by Multi-Prêts Hypothèques
What you'll learn
  • How much should you save ?
  • Where should you put it ?
  • Other options

As the media like to remind us, more and more people don’t plan for life’s little surprises when managing their finances. This observation notwithstanding, many people still fail to set up an emergency fund.

This fundamental exercise should be a part of every household budget to help face unpleasant surprises. By the way, if you need a hand, some apps can help you manage your budget.

Health problems, job loss, home repairs or car troubles can all strike at any moment, even if you’d rather not think about them 

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How much should you save in your emergency fund ?

An emergency fund should allow you to cover your financial obligations and recurring expenses for two months. However, you should really aim for the equivalent of 3 months of net income.

The 3-month period is even more relevant when you consider disability cases. Indeed, in case of disability, it usually takes 90 days for you to receive the first payments from your insurance company.

It’s recommended you set aside at least 10% of your net income with every paycheck. This way, you’ll only need a little over two and a half years to put away a comfortable emergency fund. If your income increases, your savings should as well, up to 15-20%.

Once your emergency fund is set up, your saving habit can go towards more long-term investments. There’s no need to set up a six-month emergency fund. To learn more, read our article “The Three-drawer Strategy for maximizing your budget“

Where should you put it ?

The two most commonly used options for emergency funds are TFSAs and high interest savings accounts. The advantage with the TFSA is that the yield is tax-free. The important thing is to choose a secure placement that will allow you to make withdrawals hassle free if unforeseen circumstances arise.

If you’re racking up high interest credit card debt on the one hand, it’s no use saving money at a lower interest rate on the other. Read our article for ways to get out of debt.

Life insurance

Life insurance could be another option worth considering. To find out more, read our article « Life insurance : do you need it ? » .

Key takeaways
  • You should really aim for the equivalent of 3 months of net income.
  • It’s recommended you set aside at least 10% of your net income.
  • The two most commonly used options for emergency funds are TFSAs and high-interest savings accounts.