Since widows and widowers do not have a co-contributor to family expenses, emergencies may throw the family budget into a deep hole.
A widow’s emergency fund is simply a separate amount of money earmarked for unexpected emergencies. The intention of the funds is to pay for unpredictable expenses that are not covered by normal monthly cashflow.
In today’s highly inflationary and low interest rate environment (albeit higher than 12 months ago), it’s critical to consider how much is needed, where to invest the cash and how to balance other savings needs (i.e., tuition, bills).
Purpose of an emergency fund?
As a financial planner, I’ve struggled with clients who did not believe in the value of an emergency fund or use the fund as a “slush” account to cover expected expenses such as vacations or car purchases.
However, unexpected expenses may cause widows/widowers to borrow from credit cards, lines of credits or to increase the mortgage on the family home. These options often carry high interest rates, long repayment schedules and may cause harmful damage to retirement plans.
My suggestion is to budget and save for all foreseen expenses and save separately for expenses arising from unexpected events.
For example, If a widow/widower has a 15 year old car, the purchase of a new car or frequent repair to the existing car is not an unexpected event and should be in the family budget. But, emergency dental work (in excess of amounts covered by health plans) is usually not expected and should be paid from the emergency fund.
How much money should an emergency fund have?
In my opinion, the worst unexpected event for a widow/widower is a job loss (financially speaking of course). A job loss may result in weeks or months of reduced income (i.e. from employment insurance, severance payments) or worse, zero income.
Since the widow/widower doesn’t have financial support from a life partner, making ends meet during a job loss is stressful and potentially devastating financially.
In my experience, an emergency fund should cover approximately three to six months of vital family expenses. I recommend three to six months because it’s normally the time I see clients take to find new jobs.
A widow or widower’s personal circumstances will influence where on the range they should target, for example, a widow/widower with dependent children and/or a mortgage should carry higher reserves (perhaps six months) versus a widowed individual with adult kids and comfortable retirement savings could reduce the reserve to the lower end of the range.
Where should a widow or a widower invest the cash reserve for emergencies?
The purpose of the emergency fund is to be available quickly when an emergency occurs, hence the investment objective is ease of access and safety of principle (not growth).
High risk investments may be great long term investment tools however, they are usually very volatile and may be worth less than expected when needed, hence they are not an appropriate investment vehicle.
On the other side of the spectrum, guaranteed investments such GICs or savings accounts offer low interest rates and when inflation is close to a 40 year high, the net investment return (after inflation) is negative. A negative return causes widows or widowers to constantly add to the reserve to keep up with inflation.
Since no investment plan is perfect, I suggest short term guaranteed investments for emergency reserves. If a widow or widower wants more growth, they might consider increasing the equity component of their RRSP and/or TFSA. Both registered plans have longer time horizons and withdrawals may be aligned with stronger market conditions.
Emergencies are disruptive for everyone but for widows or widower, the financial implications of an emergency may be life altering.
How does a widow/widower balance the need for an emergency reserve versus other cash requirements?
For most widows and widowers, building an emergency cash reserve competes against saving for retirement, tuition, and debt reduction so, how does one reconcile the various cash requirements?
I suggest widowed individuals prepare a retirement plan using projected income, expenses, major outlays (new cars, tuition, house renovations, kid’s marriages, etc.) and include the gradual build up of cash reserves.
The retirement plan helps widows and widowers pay for normal everyday expenses and prepare for unexpected emergencies.
Conclusion
Ensure that three to six months of vital living expenses are invested in short term guaranteed investments and while on the topic of emergencies, don’t forget adequate life and disability insurance.
If you need help calculating your emergency fund, please book an appointment and together we will identify the amount and investment vehicles for your emergency reserves.
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