Why it’s important to save for emergenciesJan 02, 2016
A BDO Canada poll last month found that many Canadians aren’t financially prepared for certain life events. Notably, 70 per cent said that long-term injury or illness would cause them financial difficulty, while 63 per cent said they’d struggle after a job loss in their family (including their own) and 53 per cent said retirement would affect their financial stability. We know that saving for retirement continues to be a concern for Canadians. In a recent Globe and Mail report, BDO trustee Kelly Chow says that 20 to 25 per cent of his insolvency clients are pensioners. But as the poll reveals, a bigger concern seems to be our inability to save for emergencies.
You’ve likely heard some of the stories coming out of Alberta of late. After the province’s worst year for job losses since 1982, some Albertans have been struggling to make ends meet as they look for work in an unsteady economy. While people who lost their jobs might have been offered severance packages, those aren’t typically intended to cover more than a couple months’ salary, which could leave many facing a shortfall in the face of a job shortage.
How to start saving for emergencies
While plunging oil prices haven’t led to a cross-country recession, the Alberta job cuts should serve as a wake-up call to all Canadians. We certainly hope for the best, that the economy will recover and companies will start hiring in droves, but it certainly doesn’t hurt to be prepared for the worst. If you currently find yourself with stable employment and manageable levels of debt, you’ll want to start saving in an emergency fund to be prepared for emergencies.
A recent RBC poll found that 46 per cent of Canadians list saving for a rainy day as a top financial priority, behind saving for retirement (54 per cent), but ahead of paying down debt (42 per cent). Furthermore, 86 per cent of Canadians under 30 are worried about finding the right balance when it comes to saving for retirement or for more immediate needs. An emergency fund should typically include three to six months’ worth of expenses, but it doesn’t need to be built up overnight. As long as you’re able to make regular, monthly payments, you will accumulate a cash reserve in no time.
Pay yourself like you pay your creditors
One way to look at saving for emergencies is to treat your emergency fund as if it was one of your creditors. Let’s say you’re using either the debt snowball or debt avalanche repayment methods, where you make the minimum payment on all your debts, while focusing on either the smallest amount (debt snowball) or highest interest rate (debt avalanche) first. You can add an “emergency savings” expense to your monthly budget, and make a monthly emergency payment that’s equal to the minimum payment on one of your credit cards. Treating your emergency savings as another form of “debt” to be paid could help you build the motivation to help you save on a monthly basis.
How do you find the right balance between saving for retirement and saving for emergencies? Join the conversation on Twitter using the hashtags #BDOdebthelp #LetsTalkDebt