Why an emergency fund is not enough to protect you from the unexpected
THE STACK #47Have you ever found yourself on the highway with a flat tire, stuck on the side of the road, and panicking about the cost of roadside assistance? It's happened to me more times than I'd like to admit. That feeling of being unprepared for the unexpected is one we all dread.
In the past decade, we've faced a global pandemic, economic crises, wars, and massive layoffs. These events have shown us just how quickly life can turn upside down.
You've likely heard financial experts emphasize the need for an "emergency fund" to handle unforeseen expenses. However, relying solely on an emergency fund is like entering a battle wearing shorts, a tank top, and carrying only a sword. Even if your sword is sharp, you wouldn't feel well-prepared for the fight. If you manage to defeat one opponent, you'd still be vulnerable to attacks from others due to insufficient protection.
Having a single account for your emergency fund isn’t enough to prepare you for the unexpected. You need multiple layers of protection. Many people feel guilty using their emergency fund when faced with a real emergency because they know they’re still ill-prepared and will be left vulnerable.
In today’s newsletter, we’ll discuss the different layers of protection you need to be better prepared for life’s challenges.
THE STACK
Define your emergencies
Money is like a spirit with a mind of its own. It requires clear instructions from us to serve us best. If we fail to give our money a purpose, it will find another use for itself.
When establishing an emergency fund, it's important to clearly define what constitutes an emergency. An emergency is an urgent, unexpected, and often hazardous situation that presents an immediate risk to health, life, property, or the environment and demands immediate action.
Make a comprehensive list of potential emergencies based on your specific circumstances and commit to using your emergency fund only when faced with a situation from that list.
Some examples of an emergency include:
Medical Emergencies: Unexpected medical expenses, such as hospital stays, surgeries, or expensive treatments not covered by insurance.
Car Repairs: Costs for major car repairs or maintenance, including replacing tires, fixing a broken engine, or dealing with accident-related damages. Now, if your car needs fixing every other Tuesday, it’s no longer an emergency and needs a space in your monthly budget.
Home Repairs: Urgent home repairs, such as fixing a leaky roof, broken heating or cooling systems, plumbing issues, or electrical problems. Getting a kitchen remodel is not an emergency 😒
Job Loss: Loss of income due to unemployment, requiring funds to cover living expenses until a new job is found.
Family Emergencies: Sudden family-related expenses, like travelling to assist a sick family member or covering costs for a funeral.
Natural Disasters: Expenses related to recovering from natural disasters, such as floods, earthquakes, or hurricanes, which might include temporary housing and property repairs.
Unexpected Travel: Unplanned travel expenses, such as last-minute flights for emergencies or urgent situations requiring immediate attention. That trip to Jamaica for your friend’s dirty thirty birthday celebration is not an emergency! 🤭
Pet Emergencies: Veterinary bills for sudden illness or injuries to pets, which can be unexpectedly high.
Legal Issues: Costs associated with unexpected legal matters, such as attorney fees, court costs, or settlements.
Emergency Relocation: Expenses related to suddenly needing to move, whether due to safety concerns, eviction, or other urgent reasons.
Have a separate account for any emergency that has a higher chance of occurring
From the list above, we can see a wide range of things that could be considered emergencies. Most of these things we might never experience in life. So when we build an emergency fund, we subconsciously believe we’ll never need to use it. This is why when we are faced with an emergency, we feel guilty using it because we never mentally prepared ourselves to use the funds.
Instead of having one savings account for every possible emergency, it's better to have separate savings accounts for specific emergencies. For example, you could have a separate fund for car repairs. After being stuck on the side of the road multiple times, I knew it was time to start a car repair fund. The next time I caught a nail in my tire, I was able to call for help and replace my tires without feeling stressed out about dipping into my emergency fund.
Other types of emergencies that need their separate account include:
Pet emergencies
Home repairs
Insurance deductibles
Having individual savings accounts for your car, home, and pets is important because, once you’ve specifically saved for that emergency, you can handle the related expenses guilt-free and without dipping into your main emergency fund.
Banks like EQ Bank, Neo, and Simplii allow you to have multiple savings accounts, and you can even rename the accounts to match your savings goals.
You need a curveball fund
The curveball fund is an extra savings fund that you can use to cover unexpected, high-cost expenses that are not considered emergencies.
No matter how well you budget, there will always be times when unforeseen expenses arise that you didn't plan for. A curveball fund allows you to handle these unexpected costs without having to use your main emergency fund. For example, if your computer breaks down and needs urgent repairs, it may not qualify as an emergency, but you might not have the budget to cover the repair cost. In such a situation, you could use your curveball fund instead of dipping into your emergency fund. Think of it as budget insurance.
I recommend that you have $500 to $1,000 in your curveball fund.
You need a buffer
Buffer is the money that you leave in your regular chequing or spending account to cover small, unplanned expenses, such as a last-minute brunch with a friend who is only visiting your city for 24 hours.
These expenses are usually small and your buffer gives you enough wiggle room in your budget without tapping into your emergency fund.
Your buffer could be $50 to $500, depending on what you feel works for you.
Get all types of insurance
Anything that would cost more than three months of your paycheque to replace needs insurance. It's much easier to pay the deductible than to replace the item, which could deplete your entire emergency fund or even put you in debt.
The types of insurance you need include:
Term Life Insurance
Critical Illness Insurance
Pet Insurance
Homeowners Insurance
Renter’s Insurance
Travel Insurance
Equipment/Appliance Insurance (for any appliances or equipment that will cost you more than three paycheques to replace)
THE TOOL
How much emergency fund do you need?
Most people underestimate how much they need for an emergency fund. When determining the amount you should save for emergencies, consider several factors, including your job stability and family size. For instance, an individual with a stable government job may require a smaller emergency fund compared to a business owner with a fluctuating income. Similarly, a single person may need less of an emergency fund than a family of four.
Step 1 - Calculate your survival expenses
Your survival expenses are all your essentials, such as housing, utilities, food, transportation, insurance, debt payments, etc.
Step 2 - Determine your job stability factor
Your job stability should be determined based on how likely it is for you to experience a loss of income and how many months it will take for you to recover.
Your job stability factor will be used as a base to calculate your emergency fund.
Stable Job (e.g., government job, long-term contract, high job security): 3-6 months
Moderately Stable Job (e.g., mid-level corporate jobs, healthcare professionals): 6-9 months
Less Stable Job (e.g., freelance, commission-based, startups, seasonal work): 9-12 months
Step 3 - Determine your family size factor
Single Individual: 1x base months
Couple: 1.5x base months
Couple with 1-2 children: 2x base months
Couple with three or more children: 2.5x base months
If you’re single with kids, deduct 0.5 points from each category.
Emergency Fund Formula
Emergency Fund = ME×(JF×FS)
ME = Monthly Expenses
JF = Job Factor (base months from job stability)
FS = Family Size Factor
Factors Table
| Family Size | Family Size Factor (FS) |
|---|---|
| Single Individual |
1 |
| Couple | 1.5 |
| Couple with 1-2 children | 2 |
| Couple with 3+ children | 2.5 |
Example:
Let’s calculate the emergency fund required for a couple working in tech, having two kids and $4,500 of essential expenses. Because tech is a moderately stable industry, they will need at least six months saved.
Emergency Fund = $4,500 x 6 x 2 = $54,000
THE ACCOUNTABILITY
Calculate how much you need for an emergency fund using the formula above.
Start a curveball fund and create a separate fund for any emergency that has a higher chance of occurring, such as a car maintenance fund.
THE COURAGE
THE KNOWLEDGE
Sinking Fund
A sinking fund is a savings fund set up for a specific purpose, such as a future expense or a large purchase. Instead of taking on debt when the expense arises, individuals contribute money to the sinking fund over time, ensuring that they have the necessary funds available when needed. This approach can help avoid the need to borrow money and incur interest charges, providing a more financially sustainable way to cover significant expenses.
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