Emergency Funds and
My last couple entries explored cash flow planning, and your unique values. Typically, families value some level of security in their financial plan, which is where Emergency Funds come into play.
The common rule for the size of a family’s Emergency Fund is 3-6 months’ worth of expenses. If your family spends $5000 per month, $15-$30,000 would be an appropriate Emergency Fund. A $7500 monthly budget would be better served by $22-45,000.
These funds would typically be available for expenses that are large & unexpected, like vehicles repairs, home repairs, strata assessments, unpaid work-leave, medical/dental expenses, etc, etc. (Note: Vacations, Downpayments and Electronics are conspicuously absent from the list.)
Some experts suggest that a savings account is the best place for an Emergency Fund – the accessibility and security being the priorities there. Unfortunately, you’ll be hard-pressed to do better than a 1% return on a savings account, which is not appealing in the face of 2-3% inflation. It feels like a waste to set this aside, and slowly lose “buying value” due to inflation.
So what can we do with this significant block of funds?
Most clients find a blend of savings account and conservative investment (targeting a stable 2-5% return) to be the best mix for security, accessibility, and keeping up with inflation.
In some cases, and with careful planning, we can hold this block against our mortgage, reducing the mortgage balance and interest payments.
Two big changes happen when a family has a proper emergency fund structure in place.
- The spouse with the “security gene” feels a tremendous sense of relief,
- We get to implement some very cool (aka. “geeky”) financial efficiency strategies that can save thousands of dollars.
I would be happy to help you get started.