Is Your Emergency Fund Big Enough?

Old furnace removed

February was an interesting month financially. Aside from eagerly awaiting the arrival of Wifey's T4 in the mail, our furnace broke down during the extreme cold temperatures we've been having.

We brought in an HVAC guy to take a look and was informed that our particular model of furnace has known problems. So much so, that the manufacturer was offering a rebate if you had this particular model and purchased a new furnace from them.

Considering we were in the middle of winter, not having a furnace wasn't an option. As a result, we asked the HVAC guy to replace our furnace.

On top of that, for a while now, Wifey and I have noticed we have a lack of hot water. This is especially true in the winter. Maybe an argument could be made that with 5 people in the house a 40 gallon hot water tank is insufficient. However, this hot water heater has been in our house for almost 14 years now and most likely, the capacity is much less than 40 gallons due to hard water deposits. This is similar to how your kettle picks up a layer of these deposits after weeks of use except this is a 40 gallon kettle and this is after years of use.

Anyway, we decided that while we were going to replace the furnace, we may as well replace the hot water tank as it was on our to-do list for the last couple of years.

As there is a push to be more energy efficient, there are rebates that we can apply for to make the cost of the installation and upgrades cheaper. However, initially, we were told the cost would be around $3,500.

A few months ago, there was a news story circulating that almost half of families in Canada are living paycheque to paycheque and that an unexpected $200 expense would be enough to cause financial insolvency.

While we were planning on replacing the furnace and hot water tank, the cost of which was unknown at the time. However, we managed to set aside $2,000 in the bank and $1,000 in cash. That left a shortfall of approximately $500.

Luckily, we have more than enough to cover two month's expenses in cash and in various bank accounts so this $500 wasn't too crazy. For even greater amounts, we have wifey's e-series funds we could cash in. We have $13,000 there. For even higher amounts, we both have ETFs we can sell on Questrade.

How much of an emergency fund do you need?

That really depends on many things. Here's a list of things off the top of my head.

1. Job security
2. Amount of monthly expenses
3. Amount of monthly debt obligations (mortgage, car payments, etc.)
4. Ability to find new work
5. Risk tolerance

Job security is the main one. How likely are you to lose your job? If you are self-employed, what happens when your clients leave or your income stream dries up? In our case, wifey is considered the expert in the ERP system her company recently migrated to as she's the only one who knows how everything is stored and retrieved in the system. I think, we can consider her job relatively safe. At least until more people learn how to use the new system. However, from what I've heard, the unionized staff are resistant to change so that might take awhile. As wifey's salary is more than enough to cover our monthly expenses, if I lose my job, it's not a big deal. It would make saving money a little more difficult, but we could make it work until I find new work.

How much do you owe each month? In our household, we are putting down $3,600 a month into the mortgage. Half of that is because of double up payments. We could stop that in the worst case scenario so we'd be left with $1,800 a month into the mortgage. 

For our total monthly expenses, for utilities and expenses like mobile phones and internet, we'd need an extra $500 a month, so that would leave us with $2,300 of basic expenses per month. If you include food and gas, maybe that's $600 a month. We could probably cut that down if we needed to. So maybe our basic necessities would be around $2,800 a month. 

In terms of risk tolerance, this is more of a question of whether or not you're willing to risk not finding work quickly enough or if you're willing to risk not having an emergency fund in cash and instead have the majority of the money tied up in ETFs or mutual funds. In our household, we have approximately $6,000 in bank accounts and $1,500 in cash on hand. If for some reason, wifey and I lost our jobs, we'd have $7,500 in funds available which should last us at least 2 months. We're $900 short of 3 month expenses based on the $2,800 figure up above.

If we need more than 3 months of expenses, we could liquidate wifey's e-series funds. The current value of which is $13,000. If for some reason, markets have crashed and the value of the fund is only 50%, we'd still have $6,500. Combined with the cash, this would be enough for 5 months of expenses. Of course, even in 2008, with a relatively risky portfolio of 70% stocks and 30% bonds, the market only lost 21%. I'm assuming an even worse crash than 2008 with my 50% lost value scenario.

Basically, there are a few things to consider. 

In our case, after we put all the money together, the HVAC guy told us that the total was $3,500. However, that was after the rebates. The actual total for the work and energy audit was around $6,200. The HVAC guy applied for the rebates, but those would be sent to us and not to him. Which makes sense. As a result, we needed to put together another $2,700. 

Wasn't a problem for us, though, now we have a hole in our bank account. However, the rebates, when they come in, will fill that gap nicely.