Life is a rollercoaster ride that is filled with ups and downs that you can’t always or ever anticipate. Being prepared for these unexpected events in your life can be challenging. When you don’t know what you are anticipating, how do you know how to be prepared?
You’ve heard it here before, an emergency fund is incredibly important to have. In case the unexpected strikes, an emergency fund can help ensure you at least have the financial means to survive and get through it.
What if you get in a car accident?
Lose your job?
Your roof of your house caves in?
Your furnace breaks in the dead of winter?
You are struck by an unexpected medical expense?
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 with being prepared?
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 that a TFSA is where you are saving for your emergency fund. This type of account makes your money easily accessible and you won’t have to pay the taxes if you have to withdraw the funds. A TFSA will also help your savings grow as your money is being invested while it sits there.
RBC has a great tool to help you calculate how much you should be saving in your emergency fund. However, if you are able to put a lump sum in the account as soon as you start it, that helps you get closer to your goal. Otherwise, figuring out an attainable amount to put in your account each month, week, or paycheck, and having this amount automatically withdraw from your account will help you build up your savings.
Building an emergency fund on a tight budget
Putting away savings for a potential emergency that might never strike can be hard to do. Especially when you are already on a tight budget and don’t have much extra money to allocate to savings. However, even though you may think nothing will happen to you or your family, it’s important to be prepared and it’s better to be safe than sorry.
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, each paycheck, etc. and then ensure you are setting automatic withdrawals so you don’t “accidently” spend the money on something else that is less important or procrastinate.
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 that you can adjust in order to be putting that money into your emergency fund instead. Even if you just put these things on hold/pause until you have reached your savings goal.
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 for something that is unknown, however, you won’t regret having this money when and if something does strike. 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 what other options are out there for you when an emergency fund isn’t an option, or perhaps it isn’t enough to cover what you need. Here are some additional options you can consider:
When financial strains happen, people turn to fast borrowing options like GoDay. In the case of a financial emergency, and if you don’t have an emergency fund or enough funds in your emergency fund yet, 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 and savings 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, whatever the case. However, this is obviously an option when you are in a bind. The most important thing to note here is if 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 also likely will have a more loose repayment plan for you which can help depending on where you’re going to stand financially afterwards. The biggest thing here is making sure 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
Obviously unexpected expenses are unexpected because you likely didn’t plan or think about them. They sneak up on you! However, there are some ways to be preventative in some of the biggest areas that unexpected expenses seem to pop up. 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 one thing here, cut out smoking, drinking too much, eating junk food, and make sure you’re exercising, etc. to keep your body in tip top shape. You’ll also want to avoid serious medical problems by catching them early. That means you need to go for regular check-ups, even when you feel completely fine! Last but not least, don’t go without insurance! Health insurance can really save you when you’re in a bind. Don’t be oblivious and just think “I’m healthy, nothing will happen to me” and have them for you and your family.
Just like humans, pets can cost a ton too. Many people also don’t think to invest in health insurance for their animals too, so these bills can be heftier than your own. Investing in a monthly pet insurance won’t cover you for everything, but it’ll at least cover you for some of the common problems with pets and help cut those vet bills.
Flat tires, and breakdowns happen. One of the biggest ways to avoid major repairs on your car is driving less. Seems simple right? Get on your two feet and walk more, take transit, hop in a taxi, 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 like getting your oil changed.
Major home repairs
This can really hit you hard. Your basement floods, your roof needs replacing, your furnace stops working in the dead of winter, maintenance on your home can seem never ending, and it all comes with a large price tag. For starters, ensure the insurance you have for your home covers most of the major things that could happen unexpectedly. 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! Another thing is to keep up with your maintenance on your house, don’t put things off until they are completely broken, replace them as they are starting to be on their last legs, or need replacing.
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. That’s why it’s unexpected! However, the one thing you can do is mitigate your risk as much as possible and ensure you are prepared for when and if it does happen. Hopefully these tips help you get on the right foot!