With the recent wildfire in Fort McMurray and the southern Alberta flooding of 2013, it is easy to see why having an emergency fund can come in handy.
An emergency fund is money that can be accessed in a time of crisis and can be used to buy food, pay for temporary housing or anything else that is needed in that time.
“Creating an emergency fund means setting aside cash for unexpected and unknown events – job loss, illness, et cetera,” said Domenic Mastromonaco, a credit counsellor with the Credit Counselling Society in Calgary.
He says there are a few important things to know when planning for an emergency fund.
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An emergency fund, like its name implies, is meant to help you get through emergencies like a fire, flood or other situation where you may need money fast. It is meant to get you out of a financial crisis so that you do not need to rely on credit.
There should be a balance between paying off debt and saving for an emergency fund. If there are no savings, then you risk having to use credit to get through the crisis. This can cause an even larger financial burden.
“The main drawback to using a line of credit is the inevitable increase to your debt load,” Mastromonaco said.
It is important to have a clear understanding of what a crisis is for your family. Some things, like car or appliance repairs aren’t necessarily considered to be an emergency. These things should be considered as irregular expenses.
Examples of emergencies can include having to fly home for a funeral, having to take unexpected time off of work, or losing your job.
“Alberta’s unemployment rate continues to approach eight per cent, making job loss the single most common emergency Albertans may need extra funds for,” Mastromonaco said.
It is also important to note that the emergency funds should be accessible immediately or at least within 24 hours.
A short-term goal for an emergency fund should be about $1,000. A long-term goal would be to have an emergency fund that would cover three to six months of living expenses.
For more information on how to create an emergency fund, Mastromonaco suggests visiting the Financial Consumer Agency of Canada’s budget worksheet, which can be found here.