Four reasons we’re increasing our emergency fund

Increasing our emergency fund is one of our main financial goals for 2021.

That feels weird to write. For at least the last two years, our financial priorities have revolved heavily on paying down our debt. We’ve made a lot of progress, shrinking our debt from $65K to less than $20K.

Becoming debt-free is still a priority for us but it’s not our only financial goal.

This is why we’re increasing our emergency fund (and how where we’re choosing to store it helps us add to the account without any work on our part).

Note: This post contains a referral link for EQ Bank. It’s clearly indicated. If you sign up using my referral link, I’ll receive a bonus at no cost to you.

Our emergency fund

One of the first steps we took when we started to get serious about our finances was establishing an emergency fund.

We started with a goal of putting away $1K…and quickly realized that would not get us very far in the event of an actual emergency.

For the first couple years of our debt-free journey, we aimed to have $5K in our emergency fund at all times. This number has fluctuated a little over that time due to…well, emergency spending. But our goal has always been to keep it at $5K.

That will continue to be our goal, even as we work toward increasing our emergency fund.

Reasons we’re increasing our emergency fund

There are four key reason we are focusing on increasing our emergency fund.

• The world feels uncertain

We have been fortunate to continue working throughout the pandemic thus far.

We both have well-paying, full-time jobs that have not slowed down at all as a result of the global circumstances.

It is not lost on me how much of a privilege it is to be able to say that.

However, if 2020 showed me anything, it’s things can change — and that change can happen quickly with little notice.

Growing our emergency fund is one thing we can do to protect our finances in the event we end up out of work for a period of time.

• We only have one debt left

After spending the better part of a couple years aggressively paying off debt, all we have left is the student loan!

Why not focus on wiping it out and being done with the debt-free journey completely?

Two reasons: the balance and the interest.

The balance of the student loan is currently less than $20K — a big difference from the starting point of $48.5K.

And as far as the interest goes, we currently pay 2.45 per cent on both the federal and provincial portion. This amounts to less than $1.35 a day — again, a big difference from the beginning where we were easily paying $9 a day.

The low balance and the low interest rate make me feel comfortable sticking to minimums while we focus on building up a more substantial cash cushion.

• A cash cushion is more versatile

I’m looking forward to becoming debt-free. It will be so nice to free up our income for, well, things that aren’t debt. I will not miss the student loan at all when it’s gone.

But here’s the thing: you can’t pay an unexpected bill with a student loan in repayment.

You can, however, use your emergency fund.

Stashing money in our emergency fund instead of shuttling it all to the loan ensures we have more money available to us if we need it.

• We have the means to save and still make progress with our debt

Even with most of our attention going to our emergency fund, we will still be able to afford the minimum payment on our loan, plus a little bit extra. Because the interest rate is so low, our principal balance continues to shrink even when we make minimum payments.

Where we’re storing our emergency fund

After procrastinating for far too long, I finally moved our emergency fund over the EQ Bank last year.

Looking for a high-interest savings account and interested in checking out EQ Bank?

I have a referral link. If you sign up with my link and make a $100 deposit within the first 30 days, we’ll both receive a referral bonus. 

I currently house our emergency fund, house savings and all our sinking funds at EQ. It’s easy to use and while the interest rate isn’t as high as it was when I started there, it’s higher than any other account I have. Highly recommend checking out EQ Bank if you’re looking for a place to stash your savings.

Final Thoughts

Increasing our emergency fund feels like the right thing to do right now.

Between the uncertain global situation, the low interest rate on our last debt and the fact that we will still be able to make progress paying minimums, building a cash cushion makes sense.

Hopefully we won’t need to use it.

Do you have an emergency fund?

Photo by Matthew Henry from Burst