Today’s financial headlines are like a mallet beating you over the head to put some cash away for emergencies.
A fresh thought on setting up your emergency fund: Ask yourself how you’d afford a $1,000 expense.
The need to prepare for the $1,000 expense was presented by a retired reader, Bob Patrick of London, Ont. I’m sharing it with you because it resonated immediately with me as a recent retiree from full-time work. In retirement, and earlier in life for sure, expenses do often come in increments around $1,000.
I’ll let Mr. Patrick take it from here with some examples: “Car repair, pet gets sick, need glasses, broken tooth, root canal, or bridge. It really is quite interesting that every month has this sort of surprise,” he wrote in an e-mail.
How can you better manage your household spending? Our experts answered your questions
The takeaway here is that $1,000 is a good starting number for emergency funds for retirees, and everyone else. Less is absolutely worthwhile, but getting into four figures and up puts you in a good position to tackle surprise expenses.
The idea of the $1,000 expense is yet another example of how the rising cost of living affects your personal finances. For sure, you may find you spend less for a routine dental bill or new glasses frames and lenses. But having $1,000 expenses dumped on you is definitely a thing.
Sick pets could easily cost that much or more, a lesson we learned in treating a terminally ill cat a few years back.
I’ve also had some lessons in expensive dental work in the past couple of years. Treatment from a periodontist for some inflammation that sprang up out of nowhere cost, whaddya know, $1,000.
Ideally, you keep the money to cover those $1,000 expenses in a high-interest savings account. Please do not talk yourself into any nonsense about using your investments to cover emergencies. Stocks have delivered unreal returns in the past five years, but this cannot continue indefinitely. You do not want to be in the position of covering a $1,000 expense in a month where stocks drop 20 per cent.
Top rates from savings ranged from 1 per cent to 2.8 per cent in late November, which is sad but livable in the context of the basic emergency fund rule saying that security takes precedence over growth potential. Security for savings accounts comes from Canada Deposit Insurance Corp. for banks and provincial deposit insurance entities for credit unions.
If you have an online brokerage account or trading app, another option is an investment savings account packaged as either a mutual fund or exchange-traded fund. Rates for these products have recently been in the 2-per-cent zone.
No emergency savings fund? Your employer could help fill the gap, report suggests
A line of credit is next best to cash, but it’s far from optimum because of the interest charges. The best rate for home equity lines of credit (HELOC), secured by the equity in your home, is 4.45 per cent right now. Some borrowers may pay more than that – maybe 0.25 or 0.5 percentage points. Regardless, HELOCs require a minimum interest-only payment every month.
Mr. Patrick says credit lines may have a role for seniors who have depleted what were once well-stocked emergency funds. “Unfortunately, when your income is fixed, the emergency fund is very hard to rebuild,” he wrote in his e-mail.
Two thoughts on rebuilding an emergency fund as a retiree: Take a share of the profits on investments in your TFSA when markets are strong and use them to replenish your emergency savings, or try and carve off a bit of your monthly income to go back into savings.
Traditional emergency fund guidance is to have enough money on hand to cover household expenses for three to six months. This is exactly the kind of advice that turns people off traditional personal finance guidance because it seems unachievable for many people and provokes a “why bother?” response.
Here’s a dose of reality on how much people have in savings from a third-quarter trends report from the job-search platform Huntr. A bit over 46 per cent of 527 people surveyed in Canada, the United States and globally had $5,000 or less on hand in savings when they faced a job loss.
Frankly, $5,000 is not bad. That’s five $1,000 emergencies, covered.
