Building your emergency fund

How to get yours going, and know when & how to use it

In the sci-fi classic novel Ender's Game, gifted children play simulated battle games with aliens at the edge of the universe, until (spoiler alert) the title character realizes during an especially intense sequence that he's in the midst of the real thing, and everything to that point has just been practice.

When you last contemplated your emergency fund, a global pandemic would have been well at the perimeter of possibilities. And yet, here we are.

Positioning an emergency fund in relation to regular budgeting

If you have an emergency fund in place, you may now be asking: How do I use it? And if you don't have one – but are fortunate enough to still be in regular earning mode – you should also be thinking about how and when you will use that fund as you begin saving.

Regular budgeting addresses recurring expenses, plus reserves for periodic capital outlays. Insurance is for the extreme where there are remote-risk/high-peril events. An emergency fund lies between.

This fund allows you to sustain your household in a time of crisis – whether that's an unexpected injury, job loss or a global pandemic – while expenses continue to pile up.

How and when you should use the emergency fund is a function of how you define "emergency." Commit yourself to the above definition when you begin saving so it's preserved for truly pressing needs – like now – and not depleted on emotional wants.

Guidance for using your emergency fund

Like Ender's alien battle, we're no longer practicing. It's time for you to actively monitor and log your spending. This will help you manage the current situation, and learn for future planning. Here’s how to use your emergency fund now:

• The immediate non-negotiable needs are food and safety. You can cut down on these expenses by shopping
brand-consciously, reducing cost-per-unit by buying in (reasonable) volume, and being vigilant about portioning and waste.
• Shelter costs like rent/mortgage and utilities are next. Federal government income supports should help indirectly, and housing-specific relief may be on its way, whether from government, lenders, landlords or a combination. Whatever form and amount this takes, it’s crucial to understand why this is a top priority: interest and penalties on short/skipped payments will compound the emotional and money stress the very next month, and further impair your finances in the recovery time to follow.
• Dispensing with all discretionaries may not be practical as you hunker down for the coming days and weeks, but try to be selective about the prudent pleasures you choose.
• Suspend luxuries and harbour no regrets. Keep your focus on the present, comforted that your conscientious actions today will improve your prospects tomorrow.
• Log where your money is coming from and where it's going, so you can manage within your changing means. That's a good habit in good times, and critical in a crisis. Many of us have a bit more time to do that these days, which could be a catalyst for you to form the habit.

Building a fund for future crises

The emergency fund's purpose, now or after the Covid-19 crisis, is to have money accessible for a specific number of months. But how many? You should start by planning for the most likely emergency: an employment gap.

1. Based on your industry and geographic location, how long do you think it would take to get re-situated? An estimate provides a goal for the number of months of funding.
2. Second, while losing income is painful, what matters most in an emergency is spending. Review your bank and credit statements from the last year, taking out anything truly extraordinary and deducting items you may be able to defer for a few months. Divide the total by 12 for a monthly average, and multiply by the chosen number of months. This is your lower limit – Add back those deferred items to obtain your upper limit.
3. Third, decide on your regular deposit to the fund, ideally aligned with your pay cycle. Assign either a percentage or dollar amount you can commit to, even if it's a small figure.
4. Now, the gut check: divide the emergency fund target by the weekly deposit commitment. This will show how long it will take for you to get there. If you feel a knot forming in your abdomen, you may want to bump that commitment. Balance that unease against the discomfort from the current budgetary sacrifice in order to arrive at a manageable medium.

Supporting role for a line of credit

As a kicker, an oft-suggested alternative to an emergency fund is a line of credit at the ready with your bank or credit union. But for some people, taking on debt at a time of financial stress may be an uncomfortable proposition.

Even so, establishing a line of credit can be an effective complement to an emergency fund, knowing that it will be there to fill the gap if an emergency hits before the fund reaches its accumulation target.

Registered or non-registered?

Your RRSP is not an appropriate choice as an emergency fund. With withholding tax as much as 30%, you will have to take a higher gross amount to net to what you need. And if the withholding is less than the actual tax due, you’ll be scrambling to come up with cash at filing time next year. Withdrawing from an RRSP for an emergency also puts retirement at risk. Keep these two needs separated.

On the other hand, the TFSA is well suited for emergency needs. With no tax to deplete withdrawals, budgeting is much more transparent. Withdrawals are also entitled to the usual re-contribution credit, which can be both the motivation and target for replenishment once the emergency passes.

For more information, please consult your financial advisor and tax professional.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. This document is published by Aviso Financial Inc. and unless indicated otherwise, all views expressed in this document are those of Aviso Financial Inc. The views expressed herein are subject to change without notice as markets change over time.