As a recently laid off employee, I’ve been looking at my finances lately to figure out how much longer I can sustain being unemployed. While I’m not fond of regrets, I have to say that one decision that I would change is not setting up an emergency fund with enough additional cash flow to sustain my fixed expenses for six months.
With all the research I did, I always read to set up an emergency fund. But I disregarded this advice because I was naive to think that my employer would never go out of business as it was a Fortune 500 company.
WHY SET UP AN EMERGENCY FUND?
In situations where a company files for creditor protection in Canada, employees are only entitled to their wages/salaries and any unpaid and unused vacation pay. So to get 16 to 18 weeks of pay is very generous from an employer and unprecedented in Canada. Needless to say, my colleagues and I are very fortunate to have been given this additional income while we search for new jobs.
For other types of situations where you have been laid off, you can use this Severance Entitlement Tool to figure out whether or not you are entitled to receive severance and if so, how much.
For those without an emergency fund and a severance package, you will generally want to apply for Employment Insurance (EI) to help supplement your cash flow. Service Canada has made it easier for people to quickly apply and begin receiving income by putting the application process online. Alternatively, you can still call in to apply if you feel more comfortable with this method.
- Apply as soon as you are laid off to minimize the gap in cash flow. You don’t want to wait more than a month to be paid. You will also lose the ability to apply if you wait longer than four weeks after the date of termination!
- You CAN begin the application process even if you have not received your Record of Employment (ROE) yet.
- To apply, you will need the following information:
- Mother’s Maiden Name
- Mailing and Residential Address
- Banking Information which can be found on the bottom of your cheque (Institution Name, Transit Number, Bank Account number)
- Name, address of telephone numbers of all companies that you have worked for in the past 52 weeks
- Your salary/wage for each week in the past year
- The reason for your dismissal
- ROE (if it is electronically sent from your employer then you don’t need to take additional steps)
Depending on the unemployment rate in the area that you live in, the number of hours you need to have worked to receive regular benefits and the length of time that you will receive EI will vary. You can determine how many hours you need to have worked on the Service Canada website.
Also keep in mind that the most that you can receive is 55% of your average insured income (i.e. the average income for the weeks you worked in the past 52 weeks) up to a maximum of $49,500. This means that to receive the full $49,500, you would need to be earning an average of $90,000 before you are laid off. This income is also taxable so don’t expect to keep all of it.
You will also have to prove that you are actively seeking employment while on EI. More information on EI can be found in the FAQ section.
For most people relying on EI, you will be receiving significantly less income than you were before and may have to adjust your spending to accommodate these changes. If you were already living paycheque to paycheque, moving to EI can cause significant anxiety and stress.
HOW TO START AN EMERGENCY FUND
1. Determine the amount of money you need to sustain yourself and your dependents for six months.
Pull out your bank and credit card statements and calculate how much you spend on average per month on fixed expenses. Below are some suggestions for some of the categories you can consider. You can also use this Emergency Fund Calculator to help you make this calculation.
- Housing: rent, mortgage, maintenance, repairs, home improvements, etc.
- Basic necessities: food, hygiene products, cleaning supplies, etc.
- Utilities: cable, internet, hydro, water, gas, other subscriptions, etc.
- Minimum Loan Payments: student loans, consumer debt, line of credit, etc.
- Transportation: car loan payments, insurance, gas, repairs, maintenance, etc.
Once you know how much you spend on average per month, consider how much you can afford to save and how frequently you can contribute to an emergency fund.
Saving six months’ worth of expenses might seem like a staggering goal and if you’re anything like me, that can easily become paralyzing. But start with a small goal like $600 and then increase until you reach your final goal.
You might wonder where you’ll be able to get that additional cash if you are already stretched thin. Making a few lifestyle changes can go a long way. Here are some ideas to get you started:
- If you like to buy your coffee everyday on your way to work, try cutting this expense out and you could save more than $100 per month
- If you switch to a package on your phone, internet and cable bills, you can receive additional savings that you can contribute to your emergency fund
- If you have outstanding credit card bills that you are paying interest on, switch to a low interest credit card
2. Choose where to keep your emergency fund
A few options include: Cash, Tax-Free Savings Accounts (TFSA), Mutual Funds or High Interest Savings Accounts.
Personally, I find that cash is easy to lose, burn, damage, have stolen or otherwise disappear; none of these risks are particularly appealing to me. I also find that I like to use my TFSA for my retirement savings (in addition to my RRSP).
You may want to put your money in a Mutual Fund because at least it will grow with time and you won’t have to keep putting your money into the Emergency Fund. At some point, the returns that the Emergency Fund is making through Mutual Funds may even exceed your six months’ supply. However, you have to remember that there are often fees and a locked in period associated with mutual funds; you will have to pay for any earnings you make and you cannot take your money out of the mutual fund early. Often you will be heavily charged for withdrawing early. Depending on your circumstance, the benefits may outweigh the drawbacks or vice versa.
Alternatively, I would recommend using a savings account with the highest interest rate at the bank that you are already signed up with. As I am already signed up with Tangerine, I am inclined to recommend their High Interest Savings Account which provides an interest rate of 1.05% annually. Additionally, Tangerine allows me to open a Savings Account online in thirty seconds or less.
Use this website to find other banks and financial institutions that offer higher interest rates. However, for convenience sake, I like to do most of my banking at one institution that has enough physical locations that I can withdraw my cash easily if needed.
3. Set up automatic transfers to your emergency fund
Hopefully you will have taken my recommendations of using a High Interest Savings Account with an institution that you are already banking with. I recommend setting up an automatic transfer because it gives you control over the amount and the frequency of your contributions while making it easy for you to not have to consciously make the effort every time. You can change either of these factors at any time as well. The idea though is to make saving as unconscious and easy as possible.
Earlier when you were crunching the numbers, you should have determined how much you could contribute and the frequency of these contributions. This information will now be helpful when you call, go in person to your branch or set up the transfer online. Don’t forget, you can always change these numbers if you need. If you are having a hard time figuring out how to set up these automatic payments, don’t be afraid to Google, call or go to your local branch for help.
4. Check up on your account
Periodically, I would recommend that you check on your account to see if you are making progress towards your Emergency Fund goal. Once you have surpassed your goal, you will want to revisit your numbers to see if your situation has changed. For example, if you have moved into a more expensive house, your mortgage or rent expense may have increased so you will have to readjust your goal to accommodate for your potential needs.
Hopefully you will never need to tap into your emergency fund. But if you do, good luck!