I had a client recently reach out to me to get my advice on a tree.

Yes, really.

There was a tree in her backyard that had recently been assessed as a danger: it was dead and becoming less stable by the day. There was a risk of it falling on her roof – or her neighbour’s - and causing major damage.

She had reached out to a removal company and had just received a quote back.


She wanted to know what the best way forward was, financially.

Obviously, the tree had to come down. Delaying might end up causing far more damage. That much was crystal clear.

But how should she pay for this unexpected expense?

We ran some scenarios and decided to use her $15,000 emergency fund to cover the cost. She contributed a monthly amount since we set her initial lump sum aside so that when things like this happen, it doesn’t wipe out her entire fund – she’s constantly building and replenishing.  We tweaked her budget moving forward to account for the need to replenish her emergency fund. Ultimately, the only consequence of this major and unexpected expense was that she contributed less to her retirement and kitchen renovation fund for approximately six months.

That was only possible because she had an emergency fund.

If you have ever Googled “financial tips”, you are sure to run across a million blogs and articles about the importance of having an emergency fund.

And having one is important.

The problem is most people don’t have a clear understanding of what an emergency fund is actually for, where it should be kept, and how much they should have in it.

What an emergency fund is for

An emergency fund is meant to cover the short-term kinks that can stall your financial plan.

You should have property, disability, critical illness, and life insurance to cover things like income loss due to injury or illness. Although those things are arguably “emergencies”, they are also long-term; preparing for them should be more involved and strategic than simply socking a certain amount of money away.

Your emergency fund should be used for:

· Short-term living expenses after job loss

· Substantial car repairs after an accident

· Emergency, necessary home repairs

· Emergency, necessary medical expenses

· Unexpected, essential travel

The key here is that all of these are short-term, not ongoing, needs. They all reflect expenses that would be substantially higher than anything in your regular budget (such as routine car or home repairs), and could therefore throw your financial plans off balance.

For my client, having an emergency fund meant she didn’t have to rack up her credit card, dip into her investments, or pull from her retirement savings. Having an emergency fund, in other words, meant her financial plan stayed on track.

Where should you put your emergency fund?

Hopefully, you never need to access your emergency fund.

But if you do need it, it should be accessible to you almost immediately.

That means it should not be wrapped up in growth or aggressive-focussed investments, or anything that would penalize you for withdrawing it. But stuffing a wad of cash under the mattress isn’t prudent, either. You can still have your money easily accessible and take advantage of some level of compound growth.

A high-interest savings account (HISA) can offer interest rates from 1-3%. So long as there are no fees, no minimum deposits, and unlimited withdrawals (or a withdrawal limit that is larger than your entire fund), a HISA is the perfect plash to stash your emergency fund.

You may also consider opening your HISA within your tax-free savings account (TFSA) or a conservative fund within your TFSA if your risk tolerance is high and you’re genuinely okay with the possibility your fund could be down slightly if you needed to pull from it in a downward market.This would allow your fund to grow tax-free. Whether you go this route depends on your TFSA annual contribution limits, and how your TFSA fits into your larger financial plan.

Remember: the goal here is not to earn a bunch of money. The goal here is to have a lump sum of money that keeps pace with inflation, that you can access immediately so you avoid dipping into other savings or relying on high-interest debt in case of an emergency,

How much do you need in your emergency fund?

The standard answer is that your emergency fund should cover 3-6 months of living expenses.

The actual amount you’ll need will depend on:

· How many people are in your household

· What kind of debt load you have

· How each adult’s career prospects look in the event of a job loss

· What the base-line comfortable living budget looks like

For most people, contributing to an emergency fund should come before many other financial goals.

But as with anything, an emergency fund should be part of your overall financial plan. Book a call with me to discuss what your emergency fund should look like, and how you can still accomplish your other financial goals while contributing to it.