Everyone says you should set aside some emergency money “for a rainy day.”
But what does that really mean? What counts as a rainy day, and how much rain are we talking?
We posed the question to a handful of the banking experts at Dundee Bank to give some real-world perspective on the idea of emergency funds, how much you need, and why it matters.
Q: Do I really need emergency funds?
A: Almost everyone should save money for emergency situations. There are some rare situations where it may not be needed but in general, it is good practice to keep some funds on hand for an emergency.
You may think that you have access to funds in the case of an emergency, such as from friends, family or borrowing money from a bank or other financial institutions, but the only real certainty would be funds set aside in a deposit account. Life can be unpredictable and getting caught without one could affect future financial standing, retirement, or other financial goals.
And if you have questions about retirement, be sure to talk to your tax advisor!
Q: How much should I save for an emergency?
A: In general, six months of expenses is a good place to start. The closer you can be to having 12 months worth of living expenses set aside, the better. You will want to look at your budget and start with the necessities such as rent/mortgage, utilities, groceries, and medical expenses. Think of it this way: If I lose my job tomorrow, what do I need to keep a roof over my head and food on my table?
If you’re fortunate enough to have a financial advisor, you should discuss an appropriate amount of funds that should be set aside for emergencies.
Q: What’s the difference between emergency funds and savings? Or a “rainy day fund?”
A: A “rainy day fund” is typically used to pay for smaller expenses that are not recurring—usually under a few thousand dollars. A few examples of expenses that would be covered by a rainy day fund would include:
- Unexpected vehicle repairs
- Home maintenance
- Appliance replacement
Emergency funds would be used in a time of financial stress, such as after a job loss or a substantial medical bill. Examples include:
- Death of a spouse
- House burning down
- Life-changing injury, like a car accident
Regular savings are typically used for things that we want but may not have the ability to purchase right. You need to put some money away for the time being, but you’re planning for it. Examples include:
- A new car
- Bigger house
- Your wedding
- That beach vacation you’ve been dreaming of
Q: How do I save for emergencies if I don’t have room in my budget?
A: Start by trimming down on the things that aren’t necessary to keep a roof over your head or food on the table. It’ll seem like less fun cutting back on dining out, having access to seven different streaming services, or making fewer trips downtown, but it will be worth it when you have the peace of mind knowing you have a fall-back plan.
Hopefully this cutting back will only be temporary until you save enough, and then you can go back to enjoying those things you cut back on!
Q: Can my bank help me plan emergency savings?
Yes! Dundee Bank would be happy to assist with this and set you up with a separate deposit account for emergency savings. You should utilize a deposit account that pays interest on your funds. A savings account or a money market account are good examples of this!