Friday, April 4, 2008

Why Set Up An Emergency Fund?

Why have an emergency fund? One word, emergencies. When i say emergency, I mean a true financial emergency. Not having enough money to pay for the vacation you have been planning for the last 6 months is not an emergency. An emergency would be if you have lost your job and you don't have the money to pay the monthly mortgage payment. You should only use your emergency fund if really necessary.

I have known for a long time that everyone should have an emergency fund, but just recently came to realize that they are a very important part of financial planning. About one month ago I was laid off from work because my employer was affected by the American Axle strike. This jolted me into the realization that I don't have an emergency fund and I might be needing one.

Thus far I have not needed to dip into an emergency fund because I had a lot of bank time built up at work and i will be able to collect unemployment. The unemployment cheque should hopefully be able to cover my monthly expenses such as food, rent, insurance, etc. However, if I was a home owner with a mortgage to pay for, i would probably be having to use some emergency fund money.

When you set up an emergency fund it is important that you can easily get at the money. You do not want it locked up in some financial vehicle where you can't get your money out easily or not at all. I would recommend a high interest savings account. There are many online and they are insured by the Canadian Deposit Insurance Corporation (I believe FDIC in the US).

The Lesson

We can all learn something from my mistake. We should be saving for a rainy day, because invariably that rainy day is going to come sooner or later. Even if you can only set aside $20/mth into an emergency fund, you should start yesterday. That $20 may seem like a small amount but over time will grow. After one year you would have $240. As for me, I have set a goal of a $5000 emergency fund. I have some saving to do!

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