An Emergency Fund? Why and How!
Article revised on 18 December 2017
Do you ever feel stressed knowing that an unexpected event could knock your budget off track? Want to avoid having to use credit? My solution for lowering your stress level is simple – an emergency fund! If you expect the unexpected, you’re always prepared! Think it’s impossible to set money aside? Here are a few tips on how to do it.
What is an emergency fund?
In simple terms, it’s a cash reserve you can access quickly from a flexible account, usually a high-interest savings account. Such a reserve can be very useful when something unexpected occurs, as it can spare you from having to reach for your credit card and incurring high user fees and interest charges.
What types of unexpected expenses might cause you to dip into your emergency fund?
Here are a few examples of legitimate reasons for using your emergency fund:
– Mechanical problem: Your car breaks down and needs repairs.
– Trouble with your water heater or a household appliance: You need to replace the faulty item quickly.
– Sickness or injury: Due to sickness or injury, you are unable to work for an extended period.
– Job loss: You lose your job and don’t find a new one right away.
– Natural disaster: Your house and personal effects are destroyed.
– Fire:While waiting for your claim to be processed, you need to replace personal effects lost in a fire.
– Death: One of your loved ones passes away.
My advice: Only touch your emergency fund in an emergency situation… The need for a vacation is not an emergency!
Building an emergency fund
I generally recommend having the equivalent of three to six months of salary in an emergency fund. Actually, the amount mainly depends on your lifestyle and tolerance level for potential risks that might compromise your financial security. Take a little time to figure out how much you might need.
Yikes! Does it seem like that’s more money than you could ever save? Don’t be discouraged: Every great journey starts with small steps.
Start by determining the amount that you could regularly deposit in your emergency fund, as you may already be doing for your RRSPs.
The important thing is to ensure consistency in your deposits. An effective way I suggest is to program automated transfers from your bank account to a high-interest savings account. It needn’t be a very high amount. To start, set aside perhaps $20 per pay, which can gradually be increased.
As the weeks and months go by, you will see your emergency fund increase and your stress level decrease.
What if nothing bad happens? You can congratulate yourself for being proactive and eventually take advantage of the additional savings during retirement!
If you still need a little convincing to get started, you won’t want to miss my next article, which deals with the best reason for putting money aside: Thinking of yourself!
Start saving now!