Level Up Your Finances: Level 6

Level 6 – You have at least 4-6 months of my monthly expenses saved in a high-interest savings account for use in case of an emergency (e.g. job loss)*

Why it Matters

Emergency Funds make sure that small bumps in the road don’t turn into massive derailments.

Most financial advisors recommend saving between 4 – 6 months of your monthly household expenses, which can seem like a lot. But Workopolis found that most people took 4 months to find their next gig.

Goals for this Level

In Level 6 we want to make sure two things are in place:

You know how much you should have in your emergency fund, and a plan to save up for it
Your emergency fund is in a high-interest savings account*

1 – You know how much you should have in your emergency fund, and a plan to save up for it

Since you passed Level 2, you’ve already done the hard work of calculating your monthly household expenses! Now we just need to figure out where you want to sit on the 4-6 month spectrum.

Like most rules of thumb, it’s entirely personal. The four-month guideline is generally recommended for households with two sources of income, who are in salaried positions and have more secure employment. The six-month recommendation is typically better suited for households with one source of income, who have less stable employment or earn variable incomes.

Remember the SMART goal framework from Level 1 when making your plan to save up for your Emergency Fund:

Specific, Measurable, and Time-based: What are the details about the goal and how will you know how you are doing? Instead of ‘build emergency fund think ‘Save 4 months of expenses by Christmas’
Attainable: Is the goal realistic? Instead of saving 6 months of your expenses in the next 3, does it make sense to do 1 month of expenses every 3 months, for a year?
Relevant: Make sure you’ve spec’d the size of your emergency fund appropriately so that it makes you feel secure and not chained down. It will be harder to save for the last little bit if you aren’t convinced you need every last penny of that fund. Conversely, it can feel pointless to save anything in the first place if the ultimate size of the fund may not help you if you need it!

2 – Your emergency fund is in a high-interest savings account

Make sure your emergency fund is working as hard as possible for you by holding it in a high-interest savings account. A dedicated account outside of your regular checking and savings will make it less likely that you tap into the funds for non-emergencies. A high-interest savings account will make sure your emergency fund is working as hard as possible for you.

If you’d like to shop around for rates, check out Rate Hub https://www.ratehub.ca/savings-accounts/accounts/high-interest

*Untangle Take

Research by Gallagher and Sabat found that $2,467 was the ideal amount to have in a Life Happens Account (we don't like the term, Emergency Fund, because the money is there for a cushion, not just for emergencies. You have this money to keep you out of debt, which helps you avoid the dreaded debt-spiral).

They found that additional money above $2,467 should be invested. At Untangle Money we like this because it is an achievable amount of money, and it means that over-and-above $2,467 you are getting your money to work for you.

A word of CAUTION: this research was done before the pandemic. You may have learned that you have different needs, either emotionally or financially.

Sometimes your bank will have a minimum amount of deposits (money sitting in your account) that you need to get the account for free. We find this can be a good place to keep your Life Happens money. CAUTION: If you tend to spend all your money (which is a very natural thing to do), then this strategy won't work for you.

What's next?

Stay tuned every Thursday for a new level in the series!