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Is your emergency fund enough for the unexpected?
By ATB Financial 3 August 2020 6 min read
Emergencies aren’t typically the first thing people think about when it comes to saving. Retirement, education, home renovations, and upcoming vacations all might seem like more exciting investments. And many Canadians think this way. According to a Globe and Mail article updated in 2018, “The majority of Canadians—52 per cent—have less than $10,000 in an emergency fund, and 41 per cent hold less than $5,000.” That means that for more than half of the population, a job loss, vehicle replacement, or natural disaster for which they are insufficiently insured could wipe out their savings almost instantly.
Unexpected expenses can arise quickly and without warning, but being financially prepared for emergencies not only helps you save money in the long run, it also gives you peace of mind.
Why start an emergency fund?
Without an emergency fund to support you through difficult times, you may be forced to choose between going into debt and dramatically altering your lifestyle. And without sufficient income or any savings, to begin with, an unforeseen expense may not only reduce the quality of your lifestyle but put you in a position of basic survival.
If however, you can draw from your emergency fund when faced with surprise expenses, you’re more likely to avoid paying interest on the loan, line of credit or credit card you might otherwise use to cover that cost.
Personal finances, personal truth.
When deciding how much to put away in an emergency fund, you should consider your current costs. We recommend taking a look at your finances and determining what your monthly expenses are. Expenses to consider are:
- Mortgage or rent
- Utilities (gas/water/electric/heat)
- Phone bills
- House or car insurance
- Transportation costs (including gas, transit, or Uber)
- Credit card debt, personal loans or other debt
- Pet costs
- Other (any other regular monthly costs you have)
Once you have a better understanding of your average monthly expenses, we recommend saving enough to cover at least 3 to 6 months worth of expenses in case of job loss or unexpected expenses like house or auto-repairs, illness, natural disasters or pet emergencies.
Emergency expenses in Alberta
As of July 2019, Alberta’s unemployment rate was 7.0%, which is 1.3% higher than the national rate. While job loss is a concern for most people, the boom-and-bust tendencies of Alberta’s oil-based economy make it an especially pertinent issue for Albertans. According to this Globe and Mail article, ‘Twenty-nine per cent [of Canadians] said their savings would only last one month or less.” As mentioned above, it is best practice to save up 3 to 6 months worth of living expenses to account for the possibility of job loss and give yourself some time to find new employment. For example, if your monthly expenses are $5,000, you should have $30,000 stashed away in an emergency fund.
For the increasing percentage of Albertans who are self-employed or employed as contractors, there’s a built-in sense of job insecurity. It’s often impossible for self-employed people to predict future income, even when they are currently able to find steady work.
Auto accidents and repairs
The most recent statistics show that 4.23% of licensed Albertan drivers were in a reportable collision in 2016. While most collisions aren’t fatal, 90.4% of collisions in Alberta in 2016 resulted in property damage over $2,000.
In addition to the cost of vehicle repairs, being involved in a collision generally causes the cost of your auto insurance to go up for the foreseeable future.
While some house repairs fall neatly into the nice-to-have category (hello, new kitchen cabinets!), others can be unexpected, urgent and expensive. When dealing with a buckling foundation, a termite infestation, water damage or a myriad of other possible problems, you have no choice but to fix it NOW. Unfortunately, doing so might run you anywhere from a few hundred to tens of thousands of dollars.
Illness and injury
We’re lucky to live in a country that prioritizes public health care, but keep in mind that some medical expenses, such as ambulance rides, dental and optometry services, experimental treatments, hearing aids, and prosthetics are not covered under Alberta Health Care.
Another expense not covered by provincial healthcare is the wage loss suffered by people with chronic illnesses and by their familial caretakers. While some federal programs like EI and the Canada Pension Plan can offset lost wages, they are subject to strict rules, and if you are able to claim these benefits, you may not be able to receive the funds as quickly as you need them.
If you’re a pet owner, you’ll also want to factor in the potential costs of veterinary care for your animal friend.
The escalating effects of extreme weather
Albertans are no strangers to natural disasters, from floods and fires to blizzards and droughts. Not only are the frequency and intensity of extreme weather in Alberta on the rise, but property damage and the cost of insurance are also too.
The CBC reports that Alberta has accounted for 5 billion dollars—or 61 per cent of the national total—in insurance damage since 2010. And according to an article on Alberta in The Globe and Mail, “The insurance bureau said severe weather events that used to happen once every 40 years are now happening once every six years, with more homes and vehicles being damaged.”
According to insurance bureau spokeswoman Heather Mack, quoted in the same article, “The cost has prompted some insurance companies to double the deductible for weather-related claims to as much as $3,000”—15 times more than the average deductible in Alberta 20 years ago.
Best ways to save
Regardless of which emergencies you decide to prepare for, it’s a good idea to keep your emergency savings in separate accounts so that you don’t accidentally spend the money on other things.
While you might be tempted to invest your emergency fund to make it grow faster, it’s important to make sure you have easy access to your money, which isn’t always possible with investments like non-redeemable GICs or mutual funds. Your best bet is to talk to your banker about your options.
If you are just getting started, take a look at our Springboard Savings Account. There is no minimum initial investment required and you can take advantage of pre-authorized contributions. This is a non-registered account, meaning your interest growth will be taxed every year.
Another simple way to save is a Tax Free Saver (TFSA) Account. This account is essentially a savings account with the tax sheltering benefits of a TFSA, where none of your interest growth in this account is taxed upon withdrawal.
If you have an emergency fund started and would like to earn higher interest on your money, consider our ATB High Interest Savings Account (HISA). You can hold your HISA in a registered account like a TFSA to shelter it from taxes, or a non-registered account which means you will have to pay taxes on your interest like a regular savings account.
All of these accounts offer the ability to withdraw your money at any time, while still allowing you to build your emergency fund steadily and securely.
ATB is here to help if the unexpected happens. But we believe the most important part of helping is teaching you how to be prepared so that money is not your biggest concern in the case of an emergency.