How to Effectively Live off of your Emergency Fund

Life doesn’t always go as planned. That’s something I’ve become intimately aware of these last six months and, because of that, I’ve also become more acquainted with my emergency fund. It’s something I’ve hoped to never use, but as I’ve had to step back from working, I’ve needed to consider. Since it’s been on my mind, I thought I’d share a little more about what an emergency fund is and how to use one.

Keep in mind I am not a financial advisor. When making financial decisions, it’s always good to seek advice from a professional. I just enjoy talking about finances and am sharing here what has worked for me personally.

What is an Emergency Fund?

First you might be wondering what an emergency fund is or how an emergency fund differs from your savings account.

An emergency fund is a savings account you’ve set up for an unexpected, emergency situation. Typically, the amount of money in your emergency fund will be enough for you to live off of for at least 6 months. It will take a while to save this up, but any savings in an emergency fund is better than no savings, so do not be discouraged if you have less than this.

An emergency fund needs to be held as a liquid asset, ie. money you can have access to right away. It should not be money locked away in a GIC, for example. This is because emergencies are not planned and unexpected situations need access to funds right away.

When planning your emergency fund, save for your essential expenses. Your emergency fund will cover things like your mortgage or rent, groceries, and basic phone plan. It would not be for eating out at restaurants, streaming services, or extra data plans.

When to dip into your Emergency Fund

An emergency fund is for an emergency. It can be tempting to dip into it just because, but that defeats the purpose of having it. Emergencies are things like an illness or injury that prevents you from being able to work and unexpected travel to support an ailing loved one.

Your emergency fund is like a safety net that is saved for true emergencies, not for things you should be saving for separately. Life expenses such as car maintenance, vacations, planned job loss when you quit your employment, and upgrading appliances are not reasons to use your emergency fund as you would ideally be saving separately for these things.

How to use your Emergency Fund effectively

I’ve been thinking about this a lot lately due to my unexpected injury and how that’s impacted my ability to work. Dipping into my emergency fund has become a reality, so I’ve been taking some steps to make sure I’m using it as effectively as I can be.

Here are some things to do and consider as you plan to use your emergency fund:

1. Look through your budget and calculate your total essential expenses. Give yourself a realistic picture of how much you will be spending each month.

2. Check your bank’s interest rate and ensure you are getting the highest savings interest rate possible to stretch your emergency fund dollars.

3. Minimize your spending and get creative with saving money. Perhaps cut back on your internet or phone service plans, learn how to get better deals on groceries by price matching, or walk places instead of paying for gasoline.

4. Keep track of your spending so you know how much you’ve spent and how much you have left. I recommend getting in the habit of tracking spending before emergencies so it will be a natural thing to do.

5. Look for other income sources. Check if you qualify for any type of government assistance, such as medical EI, disability credits, or your employer’s long term disability plan. Additional income sources may not cover your full salary but can help you stretch your emergency fund.

6. Be honest with yourself about what is an essential expense. It can be tempting to spend money as usual, but to avoid burning through your savings, it is important to not over spend on non-essential items.

Learn more about finances

If you’re thinking of focusing on finances more this year or if you’re just like me and love the topic, here are some more posts to check out:

Money Master Class: A Year of Financial Guidance

10 Reasons to Keep Track of Every Purchase you Make

What do Finances Have to do with Living Life Sustainably

Turn Dreaming into Practical Steps: 3 Financial Necessities to Change your Life

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