Do you have an emergency fund?

South Shore Breaker - - Wheels - KEVIN DOREY FI­NAN­CIAL FOCUS [email protected]­ward­

There's no doubt that sav­ing for re­tire­ment is ex­tremely im­por­tant, but it shouldn't be your only pri­or­ity when it comes to putting money away for the fu­ture.

It's also wise to have an emergency cash fund. You never know what life might bring, from ma­jor home re­pairs to an un­ex­pected job loss.

If some­thing un­fore­seen hap­pens, you want to have enough in your emergency fund to avoid “max­ing out” your credit cards. With an­nual in­ter­est rates on re­tail credit cards spik­ing as high as 29 per cent, you could find your­self in se­ri­ous debt if credit cards are your back-up.

It’s just as im­por­tant that you not tap into your re­tire­ment sav­ings or you could put your re­tire­ment plans in jeop­ardy. Early Reg­is­tered Re­tire­ment Sav­ings Plan (RRSP) with­drawals come with sig­nif­i­cant tax con­se­quences. What's more, hav­ing to sell your in­vest­ments ear­lier than an­tic­i­pated might not al­low them to gen­er­ate the re­turns you ex­pected.

You should have a sep­a­rate emergency fund that con­tains the equiv­a­lent of six to nine months of liv­ing ex­penses. Of course, that's just a gen­eral rule of thumb. You may need more, de­pend­ing on your life­style, fi­nan­cial com­mit­ments and spend­ing habits. (For ex­am­ple, if you have a large mort­gage or other debts, you should con­sider a larger emergency fund.)

A key el­e­ment to con­sider with your emergency fund is that it should hold liq­uid as­sets. You need quick and easy ac­cess to cash if there's an emergency. This rules out in­stru­ments such as locked-in GICS (Guar­an­teed In­vest­ment Cer­tifi­cates).

While stocks are quite liq­uid, they may not be ap­pro­pri­ate, ei­ther. Even high- qual­ity stocks will see their value fluc­tu­ate sub­stan­tially. It be in­op­por­tune to have to cash out when stock prices are down, and — if they fall greatly enough — there may not even be enough value to cover your need for emer- gency cash.

There are a few vi­able op­tions to con­sider, in­clud­ing money mar­ket mu­tual funds and cash­able term de­posits. The most com­mon solution is a sav- ings ac­count. Un­for­tu­nately, while this hits the mark on liq­uid­ity and safety, you are of­ten faced with an unattrac­tively low in­ter­est rate.

This is a par­tic­u­larly rel­e­vant point for small busi­ness own­ers, who un­der­stand the im­por­tance of hav­ing ac­cess to emergency funds for a range of needs — like po­ten­tial pay­roll short­ages. Their busi­ness sav­ings ac­counts tend to have among the low­est rates avail­able, of­ten zero per cent.

Another option for small busi­ness own­ers — and ev­ery­one else — is a high-in­ter­est ac­count. Check with your fi­nan­cial ad­vi­sor about what's avail­able.

A good way to build up an emergency fund is through monthly or weekly sav­ings. You can set up a pe­ri­odic in­vest­ment plan at a fi­nan­cial in­sti­tu­tion to au­to­mat­i­cally di­vert part of your in­come to your emergency fund. Fig­ure out how much you need, and then put away a reg­u­lar amount to get you there. Once you have money in an emergency fund, make sure it stays there. Re­sist the urges to spend any of it.

You may have to look at ways to pare down your ex­penses to free up cash for your emergency fund. A fam­ily bud­get can help you iden­tify sav­ings op­por­tu­ni­ties.

Speak to your fi­nan­cial ad­vi­sor to learn more about how you can best plan for fi­nan­cial emer­gen­cies.


Fi­nan­cial ad­vi­sor Kevin Dorey sug­gests cre­at­ing a sep­a­rate emergency fund that con­tains the equiv­a­lent of six to nine months of liv­ing ex­penses.

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