Okay, we all know we should having something put aside in case of emergencies, but is it really necessary to have a nest egg?
Yes, because life is unpredictable.
You don’t know if you’re going to lose your job, be unable to work due to sickness, injury or disability, or have a significant and unexpected expense to look after. If you are single or newly divorced, this problem becomes compounded because you are likely dependent upon only one income.
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The financial pundits recommend having enough savings to support yourself for six to eight months. This doesn’t mean you have to have $50,000 of cash sitting around in a savings account. It is important however, that it be in either cash or cash equivalent, meaning the nest egg can be converted into cash quickly.
Although it’s not a bad thing to have some cash sitting in an account, many may utilize their TFSA (Tax Free Savings Account) as such a resource. The nice aspect of a TFSA is that you can take advantage of the upside of the markets and not have to worry about paying capital gains tax on any amount that appreciates in value. The other nice part of a TFSA is that you can replenish any funds you remove from account on the following calendar year; not only the original amount, but the appreciated amount as well.
Another cash alternative could be insurance, especially critical illness or disability insurance in the event of a catastrophic illness or disability. This won’t give you access to cash in the event of a job loss or if your house floods, but it can supplement your income at a time when you need the money most.
It’s important that your nest egg not be earmarked for your retirement savings, or come from a home equity loan or line of credit. The intent of having a nest egg is to keep you out of debt.
Although six to eight months of savings may seem like a lot to sock away, there are clever and convenient ways to contribute to your nest egg. Try having a small amount taken off of your paycheck on a weekly basis, or schedule a pre-authorized withdrawal on a monthly basis. Small amounts can add up to a significant amount in a relatively short period of time. The best part is, if you never have to access those emergency funds for a rainy day, they will always be an asset on your personal balance sheet.