Tuesday Tip of the Week: August 1, 2017
Debt and Emergency Funds
Hello, friends and welcome back to my Tip of the Week here at Budget Boss. This week is all about debt and how it relates to your money. To me, the burden of debt is a terrible feeling. It causes stress, despair, emotional and even physical pain. To me, there is no greater weapon against the accumulation of debt other than the emergency fund. All the pundits say it; you have to have a rainy day fund just in case. From Suze Orman to Dave Ramsay to Gail Vaz-Oxlade it remains constant. They all say you have to have some money socked away in case of an emergency. Many experts will say you need anywhere from 3-6 months of living expenses in an emergency fund. I have stated several times that you should have up to one year’s worth of expenses in this fund. The reason for that is quite simple; when an emergency comes, you won’t know when it will end. One thing the experts don’t account for either is that it might not be an emergency that requires you to dip into these funds. In this post, I will go over why an emergency fund is your best bet to fighting the debt monster.
Emergency Funds Protect your Assets
I speak a lot about how saving money is important. Most people know that to be true. What about protecting what you have? People acquire many assets over time and no I’m not talking about your wardrobe. Things like your home, retirement savings and investments take a long time to build value. I remember the first 10K I saved took a year of blood, sweat, and tears to save up. (AKA staying home and not having fun). These things are in place for a reason. Your home builds equity as you pay the mortgage down. Your RRSP builds as well and will help you retire. If something happened where would you get the money to pay for the unexpected? Line of Credit? Credit Card? Home Equity? Your retirement savings? These items were not meant for buying a new transmission for the car. Having emergency cash on hand allows you to not go into debt and not have to dip into your assets. Your assets continue to accumulate interest and your Line of Credit/Credit Cards do not. The best part about borrowing from your own cash is there is no interest and no due date to pay it back. I have borrowed from myself numerous times and set a timeline to pay it back. These timelines are flexible but I always reach the end. That alone is worth its weight in gold to me.
Uncontrolled Events
Things happen all the time. It’s “Murphy’s Law.” What can go wrong, will go wrong. Financial Planning encompasses all aspects of your money. From you mortgage to your insurance you have to be ready in case the worst happens. Despite this many people leave it up to chance. Statistics show that 56% of people don’t have enough funds to cover 3 months of living expenses. If you get sick you will have to wait for Government Disability to kick in. Your group insurance through work is no different. Those benefits may make you wait anywhere up to 90 or 120 days for payment. What will you do during those months to get by? Once they do come in they will not give you your full wage as allocated by law. Can you live off 65% of your current take home pay? Even worse, what if you lost your job completely? Losing a job is very traumatic but the financial implications can be even greater. You might also have to take a job that pays less once you start working again. All these things add up to an emergency fund being crucial to avoiding debt. The right combination of liquid assets and insurance will save you from costly debt.
Controlled Events
There are very few things worse than having to miss out on a good time because of lack of money. I have done it many times. “Sorry friends I’m busy tonight!” What if what you were missing out on is an opportunity instead of a good time? Certain chances only come around once in a while so being prepared to take advantage is huge! “What kind of opportunity requires me to have cash socked away?” you might ask. How about an investment opportunity like a rental property? This could provide a secondary income that allows you to retire early or even work less. What about a job opportunity that allows you to pursue your passion. If you had to take a pay decrease in order to get this dream job would you be alright with that? Knowing it was what you love doing and will pay off, in the end, would be totally worthwhile in my eyes. What about snagging a sweet tax deduction from putting a lump sum into your RRSP? That could get you a hefty tax return that negates the initial deposit. There are two ways to take advantage of opportunities: Go into debt or use saved money. Which one do you think I recommend?
I personally believe that an emergency fund should be contributed to constantly. Even when you reach your desired security level why not keep going so you have the necessary funds to do what you want. I set new levels yearly of where I want this fund to be and work during the year to get there. I also always have my eyes open for these opportunities and will jump at the chance to make extra money. They say, “You have to spend money to make money.” Sorry but it’s true. Very rarely do opportunities come around that don’t cost you. The same is true for bad experiences. Life seems to throw nasty curveballs at you all the time and I have yet to see one that isn’t expensive. Having this emergency fund will allow you to borrow from yourself and not the bank. I know for a fact that the terms of my loan to myself will be far more gracious than one a bank employee can give.
If you would like to start saving for an emergency fund let me know as it is one of my favorite topics. Shoot me a message at joe@budgetboss.ca. Thanks for reading my post today and tune in tomorrow for Wednesday WTF, my weekly rant on things that waste your money. Have a great day friends!
“Your goal should be to pay off your credit card bills in full at the end of each month and set aside money toward your emergency savings.” – Suze Orman
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at budgetboss.ca.