1. What is an emergency fund?
It’s just like it sounds, an emergency fund is basically an amount of money that you set aside to help you manage unexpected expenses. A security blanket, if you will.
Have you lost your job? Fridge on the fritz? Maybe your pet needs an operation? These are all examples of unexpected events that aren’t a part of your normal budget, or aren’t recurring payments (vehicle registration, magazine subscriptions, mobile phone payments).
With an emergency fund, you don’t have to go into debt or
start penny-pinching to compensate for sudden expenses. Moreover,
you’ll be able to stick to your budget. Most importantly, having it
can reduce your stress levels.
A real-world example
Imagine your car breaks down. The mechanic inspects the vehicle and tells you it’s going to cost $1,500 to fix. If you don’t have that amount and you decide to pay with your credit card, it’s going to hurt. That’s not even considering how interest can affect your budget. On the other hand, if you have an emergency fund, the expense won’t have a negative impact on your daily life, and you won’t have to go into debt to pay it off.
2. How much should I put into my emergency fund?
There’s no fixed amount when it comes to an emergency fund, but a good rule of thumb is to try to save between three to six months of expenses or salary. At the end of the day, ask yourself if you lost your source of income, how long could you sustain yourself?
To calculate your emergency fund, take into account all your current
expenses: rent, mortgage, groceries, car payments, etc. The amount you
want to save will also depend on you and your family’s employment
situation. Are you self-employed and a single parent? Your emergency
fund could be higher than that of an employee without children, for
example. In other words, your financial cushion should reflect your
3. How do you create an emergency fund?
Pay your debts
Before building an emergency fund, the first thing you want to do is pay off the debt that’s costing you the most in terms of high-interest rates, like credit card balances.
Open a savings account
If you haven’t already, open a dedicated savings account for your emergency fund. The money for your emergency fund shouldn’t sit in your chequing account.
Allocate part of your budget to your emergency fund. With each paycheck or once a month, make sure that the amount you wrote down in your budget is transferred from your chequing account to your savings account.
Save the necessary amount
Are you having trouble putting money aside? That’s completely normal. Saving is a skill that takes practice. Discover our tips for saving money. Start small, and you’ll be amazed at how much you can save after only a year!
4. What are some other ways I can save?
The money in your emergency fund should be liquid. In the case of an unexpected expense, you’ll need to withdraw the money easily, automatically, and all at once. Remember that the purpose of an emergency fund is to be able to quickly handle the unexpected. That’s why Guaranteed Investment Certificates (GICs) aren’t recommended since they require you to hold the investment for a set amount of time.
Instead, look for a high-interest savings account. There are no monthly fees and there’s no limit on the number of transactions you can make between your accounts.
5. What do you do once you’ve saved what you need?
Once you’ve saved up that three to six months’ worth of expenses, you’ll have developed excellent saving habits. Keep it up by saving for goals that are important to you. Whether you want to plan a quick getaway or buy a new car, you’ll be able to save a nice sum of money without sacrificing too much or having to cut down your budget. Of course, be careful not to dip into the money you’ve set aside in your emergency fund.