Whether your car breaks down, your furnace stops working in the middle of winter, or you’re let go from your job, we all know what it feels like to encounter a financial emergency or unexpected expense.
If you have nothing in savings, you may have to turn to credit or high-interest loans to fill the gap. If you’re already struggling to pay your bills, this can feel overwhelming. An emergency fund can help to prevent this situation. Here’s everything you need to know about what an emergency fund is, how to start one, and why it’s so important.
What’s an Emergency Fund?
An emergency fund is money you save to pay for an unexpected expense. This could be anything from job loss to a home repair or an unexpected veterinary bill. Your emergency fund is meant to provide peace of mind that should you encounter an unexpected bill in the future, you can handle it without going into (or further into) debt. An emergency fund can also give you the financial freedom to leave an unhealthy or dangerous situation, such as a bad relationship.
Examples of emergencies and unexpected expenses:
- Job loss
- Home repairs
- Car repairs
- Mental health/medical issues
- Unplanned travel
- Divorce/relationship issues
How Much Should You Save in Your Emergency Fund?
There’s no magic number when it comes to your emergency fund. How much you should save depends on your specific income, expenses, and how much you can afford to save.
In general, experts recommend saving between three to six months of expenses. Expenses include your essential items like your rent or mortgage, groceries, insurance, and utilities.
Your emergency fund is not meant to cover non-essentials like eating out or getting your hair done. The purpose is to keep you from going into debt if you can’t work for a few months or you encounter a large expense.
If the idea of saving three to six months of expenses feels completely unrealistic, don’t give up. Start small, even if it’s $5 a week. Saving something is better than nothing. It can take months or years to build an emergency fund. It’s not meant to happen overnight. The most important part is to start.
For help figuring out how much to save, the Ontario Securities Commission has an emergency fund calculator to help guide your savings based on monthly expenses. It may seem like a high amount of savings at first, but if you contribute to emergency savings each pay, then it will soon add up and get you to your goal.
Where Should You Keep Your Emergency Fund?
Ideally, you should keep your emergency fund separate from your daily checking account so you’re not tempted to spend it. Open a separate account so that you can see it grow. You also want to ensure the money is easy to access, should you need it immediately in an emergency situation.
A good option is a high-interest savings account (HISA). With a HISA you can earn a higher interest rate on your savings versus a regular savings account. It’s also easy for you to access it when you need it.
Tips to Start Saving For Your Emergency Fund
To maximize your emergency fund savings, consider the following tips:
- Be realistic. Don’t try to save more than you can afford. Look at your income and expenses and figure out what is reasonable. You can always increase your savings in the future if your financial situation improves.
- Be consistent. Whether you save $5 a month or $500 a month, the most important part is to be consistent. Get in the habit of saving and don’t give up.
- If you want help staying consistent, consider automating your savings. Every payday, you can automatically have a portion of your paycheque deposited into your emergency savings fund. This way, you don’t have to remember and you don’t have a chance to spend the money.
- Invest extra cash. If you get a tax refund or a bonus at work, funnel it into your emergency fund to help boost your savings.
- Make adjustments. Just because you start at $10 a month doesn’t mean you have to stay there. If you get a promotion at work or inherit some money, you can adjust your emergency fund accordingly.
Need Help With Your Personal Finances in Canada?
Without an emergency fund, an unexpected expense can cause you to take on debt and derail other financial goals. By having a slush fund, you can feel more prepared for anything life throws at you.
If you are currently in a position where you have a lot of debt and don’t know what to do, a Licensed Insolvency Trustee (LIT) can help. A LIT is a debt professional who can assess your financial situation and help you come up with a plan to overcome your debt. Whether you’re looking to improve your financial literacy through credit counselling or need a more formal debt solution like a Consumer Proposal or Bankruptcy, LIT’s can help.
For a free, no-obligation consultation, call us today at 1-888-371-8900 or reach us online. We can help, you don’t have to deal with debt alone.
