Believe it or not, we have completed half of our 12 Week Check-Up
series. So far, we’ve looked at the importance of knowing the money coming in
and going out of your household; making SMART goals; telling your money where
you want it to go (budgeting); cutting back on spending; making saving easy by
putting it on automatic; and then last week, we challenged you to review your
debt on your journey to becoming debt free.
This week we want you to examine one aspect of your risk
management strategy – your emergency fund. Whether you knew it or not, you have
a risk management strategy. In the simplest terms, a risk management strategy
is your plan for safeguarding yourself should the unexpected occur. Your
emergency fund is (or should be) a part of your strategy.
fund, otherwise known as a “rainy day” fund gives you a sense of comfort during
times of financial uncertainties. It can help shield you when unexpected but
necessary expenses pop up, such as appliances
that suddenly refuse to function, major car repairs, or medical bills from an
extended illness. It can also help you cover your bills during job loss.
Your emergency fund will
help you avoid using credit and
falling into debt when the unexpected occurs. It is an important tool to help
you manage your risk and protect your financial position.
you keep your emergency fund?
Your emergency fund should be kept in an interest-bearing bank
account. You should keep this fund where it is accessible on short notice, but
not too easily, to give way to the temptation of making withdrawals for
How much is enough to keep in your Emergency
There are several
opinions about how much money is enough money to keep in your emergency fund.
Some experts suggest 3 to 6 months of basic living expenses. Others suggest
even more, based on the current economic climate.
So, just how much do you
need to keep in your emergency fund?
That all depends on your
financial situation. Remember, your emergency fund should be able to cover you
when unforeseen expenses pop up. It should be able to cover your household
expenses, should a minor crisis occur. Similarly, it should be able to cover
you during a major, extended crisis. For example, if you lose your job, it
should sustain you until you are able to find another job. It should also be
able to cover any unexpected medical expenses that may arise that are not
covered by insurance. Considering these factors and your current financial
situation, you should have a sense of how much money you need to have in your
emergency fund to feel secure.
This week, take some
time to compare your financial obligations and the money that you have in your
emergency fund. Is the money in your fund enough to cover your expenses for one
month, three months or six months? Is it enough?
If you don’t have an
emergency fund, start building one today. It may seem difficult, but just
imagine how much more difficult it will be should an emergency arise. Examine
your finances again, and find ways to put aside money – even if it is a little
– specifically towards an emergency fund. Of course, the monies put
aside towards this fund should be used for emergencies only!
Your prescription for Week 7
Next week we will focus on another aspect of risk management.