Emergency Reserves

Years ago, I actually had someone say to me that they didn't need to put money aside because, "I don't plan on having any emergencies."  Letting that sit without a response for a moment or two (I may have raised an eyebrow), he had time to contemplate what he had just said, and walked it back.  No problem - it was a simple case of saying what he needed in order to reinforce his existing behaviour.

The fact of the matter is that we do not control much of our lives.  Things happen to us that are out of our control.  I am an excellent driver and have never caused an accident, but have been a car accident victim 6 times in the last 20 years.  (As an aside, over 75% of drivers see themselves as above average in their skills - statistically impossible to be true).

A news story on the radio this morning was of a Langley family that was in dire financial troubles because their basement tenant wouldn't pay the rent, and they could no longer afford the mortgage.  I thought to myself, "What about their emergency funds?".

As a matter of financial prudence, it is basic financial planning to be able to quickly put your hands on 3-6 months worth of living expenses.  For a family that has basic needs of $4,000 monthly, that could be $20,000 or so.  They sometimes tell me that money would be better off paying down their mortgage at 3.5% than earning a paltry 1.2% in a savings account.  They will be correct 99% of the time.  Then, one spouse will lose their job or suffer a medical emergency and they are in trouble.  When you place a lump sum against your mortgage, the bank expects the regular payments to continue, and will not provide leniency due to a previous lump sum deposit.

We also don't advise having a line of credit available for emergencies.  In times of stress and need, the answer is rarely to go into debt.  And besides, it's not normally the case, but lines of credit can be called for full or partial payment at any time, as they are "demand loans".  This happens in economic downturns - the very same ones that can cause someone to lose their employment.

Legendary investor Warren Buffett keeps a sizeable amount of cash in his portfolio.  It can always be invested in more stocks, but he prefers to "keep his powder dry," as the saying goes.  If one of his companies needs a cash injection or there is a buying opportunity to acquire a company, he is ready to act.  Buffett also likes to say that, "It's only when the tide goes out, that you see who's been swimming naked."  When the tide goes out in your life, will your financial well-being be exposed?



Alain Quennec, BComm CFP FMA CIM is a Financial Advisor and Portfolio Manager with RGF Integrated Wealth Management. The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.

© 2018  RGF Integrated Wealth Management. Ltd., RGF Wealth Management. Ltd., Member - Canadian Investor Protection Fund

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