An emergency fund can help you handle life’s ups and downs, which you can never anticipate. Being prepared for unexpected events in your life can be challenging, but it is doable.
The pandemic has shown us that you never know what could happen. An emergency fund can lighten the blow and provide you with the funds you need, no matter what life throws at you.
Of course, the pandemic is an extreme example, but here are a few more scenarios you might want to consider. What if:
You get in a car accident?
Your car breaks down?
You lose your job?
Your home’s roof starts to leak?
The furnace stops working in the dead of winter?
A strike or civil disturbance makes it impossible for you to get to work?
The list of unexpected things goes on and on, so ensuring you have what you need to keep yourself afloat is important. But where do you start?
What is an emergency fund?
According to Investopedia, an emergency fund is a readily available source of assets to help people navigate financial dilemmas, such as the loss of a job, a debilitating illness, a major repair to your home or car–not to mention the kind of major national crisis COVID-19 has created. The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses. It also reduces the need to either draw from high-interest debt options–such as credit cards or unsecured loans–or undermine your future security by tapping retirement funds.
What’s in your emergency fund?
Financial experts claim that having an emergency fund is key for financial stability and will reduce financial stress. It’s recommended that your emergency fund contains enough money to cover at least three months of living expenses. While the basic rule of thumb is to have enough money to cover at least three months of net income, there is no harm in having more than three months saved.
Where do you start saving this money?
It’s recommended a TFSA is the best place to save for your emergency fund. This type of account makes your money easily accessible and you won’t have to pay tax if you have to withdraw the funds. A TFSA will also help your savings grow.
RBC has a great tool to help you calculate how much you should be saving in your emergency fund. If you can start with a lump sum, it will definitely help you reach your goal sooner. Otherwise, figure out an attainable amount to put in your account each month, week, or pay cheque. Then have this amount automatically withdrawn from your account and transferred into the TFSA so you can’t spend it.
Building an emergency fund on a tight budget
Putting away savings for a potential emergency can be hard to do when you’re already on a tight budget. Even though you may think it’s unlikely something like could happen, it can and it does to many Canadians. It’s important to be prepared and it’s better to be safe than sorry, so an emergency fund must become a priority.
Here is a step-by-step guide on how you can build your emergency fund even if you’re living on a tight budget.
Define your savings goal
Start with a small, but achievable goal. You don’t want to add more stress on you and your finances in order to reach an unrealistic goal. If you can only put aside $25 per paycheck, then that is better than nothing. It may not seem like much, but when you consistently do this, you’ll begin to see your savings grow steadily which will be incredibly rewarding.
Pick how often you can contribute such as weekly, monthly, or each pay cheque. Then ensure you have set automatic withdrawals so you don’t “accidently” spend the money on something else that is less important.
Readjust your budget
Do you pick-up a morning Starbucks every day before work? Do you order take-out more than you cook? Are you paying for subscriptions to things you’re hardly using? Readjust your budget to see what areas you are overspending in. Then direct that money into your emergency fund instead. You can even put subscriptions on hold until you have reached your savings goal and then start them up again
When to use your emergency fund?
Now the trick here is to not use your emergency fund for anything but a financial emergency. It can be tempting to use money that’s just sitting there. However, you won’t regret having this money when and if disaster strikes. The only time you should be using these savings is if an emergency comes up that puts you in a financial bind, and no, a shopping spree or overspending on useless things on your credit card does not count. Sorry!
Additional ways to tackle unexpected expenses
Aside from creating and using your emergency fund when unexpected expenses strike, let’s talk about other options. Only use these if you don’t have money saved for an emergency yet, or you haven’t saved enough:
When financial strains happen, people turn to fast borrowing options like GoDay. In the case of a financial emergency, we can help get you the cash you need in 24 hours. GoDay partners with the most reputable financial institutions and uses the fastest tools in the industry to make sure you get the speediest service possible when you are in a bind. We’re not encouraging you to skip creating an emergency fund, but we are here when you need us.
Dip into your savings
Obviously this isn’t ideal, as you were probably saving for something else. Whether it be retirement, that dream trip, a new house, you probably don’t want to tap into this money. However, this is obviously an option when you are in a bind. The most important thing to note here is whether you’ll be penalized for the withdrawal.
Borrow from your family
This is the most ideal scenario as your family will hopefully not be charging you interest on the borrowed money. They will probably have a looser repayment plan too. The biggest thing here is that you ensure that your family member and you are on the same page. You don’t want to cause family drama over borrowed money or have it affect important relationships in your life.
How to avoid unexpected expenses
Unexpected expenses sneak up on you. However, there are some ways to prevent them in some of the biggest areas of your life and finances. Here are some examples and tips:
We obviously all hope that we just won’t get sick, however, that’s not always reality. Obviously investing in your health is a good way to protect it. For instance, you can stop smoking, limit alcohol, stop eating junk food, and exercise to keep your body in tip-top shape.
You’ll also want to avoid serious medical problems by dealing with problems early. That means you need to go for regular check-ups, even when you feel completely fine! If you don’t have a family doctor, visit a local clinic at least once a year.
Just like humans, pets can get sick too. Unfortunately, many people also don’t think about health insurance for their animals until something happens to them. Vet bills can be huge, but pet insurance breaks up the cost into affordable payments. It won’t cover everything, but it will help with major costs for expensive procedures such as surgery.
Flat tires and breakdowns happen. One of the biggest ways to avoid major repairs on your car is by driving less. Seems simple right? Get on your two feet and walk more, take transit, hop in a taxi, or bike. Look for ways to use your car less. People that drive a ton every day are the ones that are likely going to need maintenance sooner than later. Another key thing to do here is just like regular check-ups at your doctor, make sure you keep up with maintenance on your car.
Major home repairs
This can really hit you hard. Your basement could flood, your roof might need replacement, or your furnace could stop in the dead of winter. Home maintenance can seem never ending, but ignoring it will cost you more.
For starters, ensure the insurance you have for your home covers most of the major things that could happen unexpectedly. For example, if you are in an area that has a tendency to flood, or get heavy rain, make sure you are covered for flood damage! If you live in an earthquake zone, get earthquake coverage.
Tip! Experts recommend getting quotes from at least three places before doing any job on your home!
Planning for the unexpected isn’t always easy. You don’t know what could be coming for you and your family. However, you can mitigate your risk as much as possible. This includes takes precautions and saving so you have money to deal with the unexpected.