Let’s face it, emergency funds are a lot like plungers. They are not glamorous and hopefully you don’t use them very often – but when you need it you’ll be glad you have it.
An emergency fund is money you have set aside for use when life goes sideways, as it has a tendency to do from time to time. It can range from a dryer repair to a medical emergency. Regardless of the severity, these situations have you shelling out money – unexpectedly.
Unfortunately, most Canadians do not have money put away for these unexpected events. Recent statistics show that less than 44% of Canadians have less than $5,000 saved for emergencies and a quarter of Canadians live paycheque to paycheque with no emergency cash at all.
If this sounds like you don’t despair, building an emergency fund is not an impossible task. Here’s how to do it:
How much? – Ideally you want your emergency fund to be 3 to 6 times your monthly take home pay, but at the very least you will want it to cover your basic needs, like food and household bills
How to? – Building an emergency fund if more of a marathon than a sprint. Commit to building it steadily over time.
•Determine how much you need and how much you can save towards it on a monthly or bi-weekly basis.
•Automate your contributions. Have your savings come straight out of your bank account, this ensures you don’t miss a planned contribution.
•Trim unnecessary spending like eating out less, reducing cell phone or TV packages or arranging car-pooling if possible.
•If you get a bonus or unexpected refund don’t blow it all. Save a portion for your emergency fund and a portion for fun.
Even if you have a line of credit, it’s still recommended that you save to an emergency fund. Drawing on a line of credit increases your debt and you incur interest charges. Also, getting comfortable with one type of debt can snowball into other types of debt.
Most importantly, don’t be tempted to use the emergency funds you saved. It really is for “Real Emergencies”
How to make it grow? – Turn your savings into an investment. Work with your Certified Financial Planner to assess your risk tolerance and help you select the right investment. You’ll want to ensure that the money is quickly accessible to you, preferably with no redemption costs.
Emergencies are a fact of life, but you can cushion the effect when you are financially prepared. Keep your financial life in order and your stress level down. Talk to your Certified Financial Planner about getting your emergency savings started.
This column is written by Michelle Weisheit CFP, IG Wealth Management and presents general information only and is not a solicitation to buy or sell any investments. Please contact your own advisor for specific advice about your situation.