Monday Morning Money Moment: September 25, 2017
The Facts on Emergency Funds
We have all been there. That gross feeling knowing when you know you have no money. Being broke sucks; sucks real bad. I have been there before, knowing you literally had zero dollars to your name. Worse than that, I had an empty fridge and bills due at the time. Over the many articles I have written, I have discussed the importance of the Emergency Fund. Having money socked away for no purpose at all except for peace of mind is worth its weight in gold. I know for me, it helps me sleep better at night. Despite this fact, the stats show that many people have very little or no emergency savings. In America, it is startling to see the reality of some people’s financial picture.
6+ months savings:
Millennials – 23%
Boomers – 38%
3 months or less savings:
Millennials – 22%
Boomers – 15%
No savings at all:
Millennials – 25%
Boomers – 27%
Report by CNBC in June of 2017:
https://www.cnbc.com/2017/06/20/about-57-million-americans-have-no-emergency-savings.html
These facts are scary and it doesn’t get much brighter for Canadians in the same position. In a poll by Manulife, Canadians appeared to be in the same spot as their American counterparts.
24% don’t know how much they have saved up (which means they have none in my opinion)
14% have not put any money away
9% have less than $1,000 at their disposal
28% is the average amount of money monthly, going towards mortgage payments for those polled
$174,000 is the average amount owing on the mortgages of those polled
46% of those polled said they would have difficulty paying their mortgage within six months if their primary income earner lost his or her job
These are startling statistics. Even more startling is the fact that Canadians have over 1.7 trillion in total debt. On average, Canadians have $22,125 in non-mortgage debt which includes credit cards and lines of credit. What this means for many Canadians is that they are in large amounts of debt and also don’t have money saved up either. This is a dangerous position to be in. The cost of consumer debt wrecks havoc on one’s monthly cash flow. Damaging interest means that less money is attacking the principle of the debt and more is going to service it. What then happens is people will pay down debt, all the while re-accumulating it. This is a vicious cycle that over time leads to you being in more and more debt. The solution to this problem is fairly simple.
- Maintain a positive monthly cash flow, do not spend more than you make every month
- Contribute to and maintain emergency savings, this will make it so you don’t accumulate debt
While I do believe people are spending reckless amounts of money on damaging consumer debt, I don’t believe it is out of complete disregard for their financial situation. I believe that people accumulate this debt through the compounding of daily routines that add up over time. As these routines cause debt to accumulate little by little, the person becomes accustomed to living in debt. That is when disaster strikes. An unexpected large cost causes the person to go into even more debt but this time it’s for a large amount. This causes monthly debt repayment costs to jump and meeting monthly obligations becomes more and more difficult. Types of unexpected large emergency costs:
- Taking extended time off work due to injury or illness
- Car Problems
- Large Home Expenses such as a roof, water filtration, heating/cooling costs, etc.
- Unexpected funeral costs
- Caring for a sick loved one
- Losing your job
Now it becomes necessary to take a drastic measure such as use home equity or acquire a consolidation loan to limit costs. While this provides a bit of temporary relief you either now have a longer time to pay down your mortgage or have a structured loan that weighs you down every month. Both hurt you very much, in the long run, to provide you that temporary relief.
Having an emergency fund is about more than being able to pay for emergencies that occur from time to time. What my emergency fund provides me is the flexibility to adjust my monthly cash flow as small costs occur here and there. I do not spend the same amount on life every month as some months have more events or unexpected costs. When that happens, I use my excess funds to pay down these expenses and then replenish the excess funds. That is the number one purpose for my emergency fund. The second purpose is, of course, the large, unexpected emergency. This can include unexpected time off work due to illness or injury. Car problems or even repairs to the home can also occur. For me, employment will often cost me excess cash here and there. I have backup money that I use to cover these costs and then pay back the emergency fund.
It is a system that allows for my bills to always be paid and debt not to control my life. When large expenses come, I’m prepared. When small expenses happen monthly, I adjust cash flow on the fly and then end the month in the positive. It is the emergency fund that allows for this flexibility. Emergency funds are not just for cash flow or large expenses. Emergency Funds can be and should be used for everything in life including:
- Small Business
- Rental Properties
- Educational Costs
- Child Rearing Expenses
- Investment Opportunities
- Caring for Elderly
- Pretty much anything that could have unexpected costs
It is important to understand that as you add on expenses to your life like a car, home, child, business, schooling, etc., you must make the emergency fund larger. This is why I recommend never stopping adding to emergency savings. Once you have hit a comfortable plateau, create emergency funds for everything in your life. It is this mentality that will allow you to live worry-free financially. This sounds daunting and difficult but it can actually be fun and exciting. I am aware of several people who get a thrill out of new savings plateaus. The key is to get started paying off debt and building emergency savings. Experts say you should have 3-6 months saved up. I recommend one year’s salary so you can weather any storm.
Thanks for reading my post today about Emergency Funds and don’t forget to tune in tomorrow when I explain how you can start your own emergency fund. If you have any questions shoot me a line at joe@budgetboss.ca. Have a great day friends!
“I believe that through knowledge and discipline, financial peace is possible for all of us.” – Dave Ramsey
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at www.budgetboss.ca.