Clearly, after recent catastrophic rainfall pelted parts of BC along with our neighbours to the south, both governments and individuals alike need to reflect on just what to do in such an emergency. Those unfortunates, who spent several nights in their cars and trucks, blocked by road closures and mudslides are also wondering how to cope with the next weather emergency.
In the world of investing catastrophic events also occur. We refer to them as Black Swans. A Black Swan is an extremely rare event with severe consequences. One way of dealing with such events is to create a rainy-day fund. Such a fund would provide ready cash in case of an emergency. It follows that such a fund needs to have certain characteristics.
1. All securities should be readily transferred into cash.
2. The amount available should equal your income for about six months.
3. This amount should not be subject to taxation or penalty when withdrawn.
4. And it should not require the approval of some third party.
5. You should repay it, as soon as you can within the rules, for future emergencies.
A rainy-day fund can be valuable for other emergencies. The most common event is the unexpected loss of employment. Medical necessity is another area along with accidents that can happen to anyone. You may find such things as heating units and appliances giving up the ghost unexpectedly as well as automobiles requiring costly repairs.
Remember the rainy-day fund is there to cover events that require money quickly and which are not expected.
Borrowing or using a credit card is a common way many people cope with unexpected emergencies. But there is a downside to such a plan. You often end up borrowing money at very high-interest rates. This debt can prove hard to pay down. Even bank loans against property are expensive. Payday loans should be avoided if you have any concern for your sanity and happiness.
There is one way, however, which provides cash quickly and earns income free of tax. What is this miraculous method you may ask? In Canada, we call it a tax-free savings account (TFSA). Setup as a rainy-day fund it works extremely well to provide cash when needed.