It’s strange, the question of an emergency fund rises up a lot. If you don’t know what an Emergency Fund is, it’s a pool of cash you set aside for emergencies. Most financial advisors recommend between $1,000 to $5,000.
The reasons for an emergency fund basically boil down to – don’t get into debt! Sometimes, expenses outside of your budget happen – a blown tire, an accident, sick days that aren’t compensated.
Having a fund that you can call on to help ease fluctuations in expenses and income keeps you from dipping into debt to cover it, removing you from the spiral of indebtness and poverty. It’s also comforting to have some money around that you could just use…
Of course, there’s another train of thought that says – don’t bother with an emergency fund; especially when rates are so low. You can get a much better return investing it and so long as you have a good credit rating and multiple forms of credit (Line-of-Credit or credit cards); you can use those as emergency funds. With a LOC especially, you only pay for what you use and the rates are often very decent.
This way, the money you’ve invested will ‘work’ for you and you can dump it if and when an emergency happens. It’s not necessarily a bad idea especially with the TFSA accounts these days. The bad part of course is that you just don’t have that mental cushion anymore.
Myself, I lean towards the investing side – but I’m pretty comfortable and confident with investing. For others, pure cash might be the better option. It’s all about your risk tolerance…