Emergency Funds—An Important Part of Financial Planning
How long would your current savings last in an emergency? What if you suddenly lose your job or face unexpected expenses, such as urgent home or car repairs? Maybe you want to make a career change, possibly to self-employment, and will experience a less stable financial situation for a while.
Do you have ample savings put away to help you get by, or would you suddenly have to rely on credit cards and loans for everyday living expenses? Experts recommend having savings of three to six months available to cover living expenses. Few people have this much stashed away in an emergency fund, however.
Relying on credit in case of an emergency can cause you to quickly fall deeper into debt. Saving habits of Canadians have changed in recent years, with people saving less and taking on larger amounts of debt.
Tips to Set Up an Emergency Fund
Set a Realistic Savings Goal. Whether it’s a certain amount such as three months living expenses, or a date by which you want to save the amount by, it gives you a goal to work towards. Start with an amount you can manage so that you don’t get discouraged. Even a small amount helps in the long run, and you can always increase it as your finances improve.
Open a Savings Account. You want to save the money for your emergency fund in a low risk account that you can easily access in an emergency. Ideally it should have no/low transaction fees, no penalties to withdraw and earn you interest as you save. Talk to a financial expert for advice on what is best for you.
Continue to Pay Your Debts. Always make at least the minimum payments on credit cards, loans, and sources of debt. Make sure you have irregular expenses covered as well like insurance payments and property taxes. Set aside what you can for your emergency fund with these expenses in mind.
Make a Budget and Keep Track of Spending. Awareness of where your money goes is important to making smart financial decisions. It helps you to become aware of wasteful spending and eliminate it. Track your expenses, and use cash rather than credit to help cut back on impulse purchases you rely on credit for.
Made Extra Payments. If possible, deposit money over and above your allotted amount whenever you can. It may be from a tax refund, a gift, a work bonus, or something you sell. If you finish paying off a loan, direct that freed up money towards your savings going forward.
Eliminate Unnecessary Expenses. Look at your expenses and determine which are needs and which are wants. You need to pay your mortgage or car payment. You want a new pair of jeans or the latest Smartphone. Can you bring lunch to work or make coffee at home, rather than purchases them each day? Do you use savings coupons and pay attention to specials? Small lifestyle changes can add up to notable savings.
Benefits of An Emergency Fund
There are many benefits to having an emergency fund in place. It helps to be prepared for the unexpected.
- You are better able to handle emergencies without getting into debt such as sudden health issues, an urgent trip to the veterinarian, job loss and unexpected repairs.
- You can avoid high interest loans, increasing credit card debt and relying on payday loans and credit card cash advances.
- You will have greater control over your finances and as a result, less stress at an already difficult time.
- The thought of saving for an emergency fund can be intimidating when you have so many expenses and monthly payments to handle as it is.
- Start small if you need to and think of it as a long-term goal. Every little bit you manage to put aside may help down the road.