How much should I have in my emergency savings fund?
We all got the shock of a lifetime when the pandemic hit. We quickly learned that a closet full of toilet tissue may be less important than an emergency savings fund.
In the case of the pandemic, the government of Canada stepped in with numerous programs to help soften the financial impact. But is the support enough to cover all of your short-term fixed expenses? What about emergencies that require self-financing?
Are you prepared for these financial emergencies?
Employment insurance isn’t available in every situation. According to the Canada Revenue Agency (CRA), your loss of employment must be “of no fault of my own”. As of January 1, 2020, in most cases, if you are eligible for EI you will only receive 55% of weekly insurable earnings up to a maximum of $573 per week. Will $2,292 per month (subject to tax at your tax rate for the year in which it was received) cover your fixed expenses? Self-employed people who don’t already pay into the EI special benefit program may have no financial fallback to cover short-term expenses.
VEHICLE REPAIR OR REPLACEMENT
According to the Transmission Repair Cost Guide, “the average cost of transmission replacement ranges from $1800 to $3400.” an expense not covered by your vehicle accident insurance premium. Also consider that if your otherwise perfectly good used vehicle is written off, you’ll need to be prepared for the replacement cost.
During the spring of 2017, Karrianne was at home and happened to look out her front window to find the City of Winnipeg spray painting a large X on her sidewalk and yard. It turns out the main water line to her house had sprung a leak and she was responsible for repairing it. This isn’t a surprise to everyone, but it was to her. Luckily her insurance policy had provision for water and sewage lines that paid 85% of the $8,000 bill. The moral of the story? Make sure you have that coverage on your property insurance and review your policy with a critical eye for what isn’t covered.
UNEXPECTED MEDICAL EXPENSES
We’re fortunate in Canada to access healthcare services at no cost. Although most healthcare is covered, depending on your province of residence you may be responsible for payment of expensive dental work, prescription drugs, air and ground ambulance, and long-term care. If your privately-held health insurance doesn’t cover these expenses, you will have to.
We’re living longer than ever. On average Canadians are celebrating 82.52 birthdays.
LOSS OR REDUCTION OF YOUR EMPLOYER-SPONSORED BENEFITS
If you lose your job you may find yourself without any disability or life insurance coverage. The risk is that you may find yourself without protection at a time when you need it the most.
Emergency savings strategies
Emergency savings vs. debt reduction
One way to minimize the impact of an emergency is to reduce your fixed expenses. One of the expenses to monitor in particular is the percentage of your income that is being used to pay for debt. Depending on your circumstances and the type of debt you’re carrying, you’ll need a plan to consider both savings and debt.
Save it away for a rainy day
Setting aside or having access to 3 to 6 months of your regular after-tax pay to cover expenses while out of work may be the right strategy for you.
- TFSA – invest in a tax-free savings account to benefit from investment growth and withdraw funds at any time tax-free.
- High-Interest Savings – review your current savings account rate and consider moving to an account that pays higher interest.
Protect your income in the event of an emergency
- Critical Illness Insurance – usually pays a lump-sum payment if you are diagnosed with one of the diseases covered by the policy. The 3 most common illnesses covered are cancer, heart attack, and stroke.
- Disability Insurance – if you don’t already have a disability policy through your employee group benefits, it may be a good idea to look at disability insurance. These policies replace 60-80% of your income up to a maximum amount for a specified period of time.
- Health and Dental Insurance – extended health benefits pick up where Medicare leaves off. Most policies offer a variety of additional coverage: prescription drugs, hearing aids, upgraded hospital care, medical appliances, home healthcare service, massage therapy, accidental death, and dental.
- Long-Term Care Insurance – Canada’s health act does not cover long-term care in a personal care home. Your coverage will depend on government assistance provided by your province but you can expect to pay $900-$5,000 per month to receive care according to the Canadian Life and Health Insurance Association (CLHIA).
- Pet Insurance – this relatively new insurance can be expensive, but if you are a pet owner, you know that veterinarian bills can be too.
Borrow against an asset
- Cash surrender value in your permanent life Insurance policy – if you need cash quickly you may be able to borrow against the cash (not the death benefit) in your insurance policy.
- All-in-one account – with an all-in-one banking account all of your income is deposited into one account that services all of your debt. There are no fixed mortgage payments and you can access the equity in your house for short-term cash requirements if needed. Because it’s a consolidated picture of your finances, it’s in your face that you’re in debt until you’re not!
- Line of credit – having a line of credit set up in advance of an emergency means that you don’t have to try to apply for credit when disaster strikes.
Emergency savings calculator
What’s the verdict? Are you prepared?
Whatever the verdict, this is an important time to check in with your financial advisor. If you have a financial life plan in place you know it’s dynamic and your advisor will be ready to help you navigate change.
The Conference Board of Canada studied the impact of financial advice on the Canadian economy for The Investment Funds Institute of Canada. Investment Executive (June 25, 2020) reported some of the highlights of the study:
“Early savers — those who start saving at age 25 — who don’t use an advisor spend 3% more during their working years and have 19% less savings in retirement. A financial advisor could have boosted an early saver’s retirement savings by 55% and retirement consumption by 23%, the report found.
Late savers — those who start saving at age 35 — who don’t use an advisor were also assumed to spend 3% more during their working years, ending up with 20% less savings in retirement. The report found an advisor could have boosted a late saver’s retirement savings by 60% and retirement consumption by 25%.”
Make sure the financial decisions you take today are strategy-driven, not panic-driven, and that your actions are aligned with your vision of the future.
The information in this commentary is for informational purposes only and not meant to be personalized financial planning advice. The content has been prepared by the team at Fraser & Partners from sources believed to be accurate.