September 8, 2022
An emergency fund covers unforeseen costs and helps you avoid taking on debt and the stress that goes with it. Learn 3 ways to boost your emergency savings.
If you have recently suffered any kind of financial crisis, you understand the importance of having an emergency fund. According to the new BDO Affordability Index, almost half of Canadians say having an emergency fund is more important because of the pandemic. One of the toughest things about a financial emergency is that it can be emotionally and financially taxing. If you aren’t prepared, you could find yourself adding to your debt load to survive the crisis.
Having emergency savings to cover unforeseen costs — like a car or home repair, a sudden layoff or an emergency visit to the vet — helps you avoid taking on debt and the stress that goes along with it. But not everyone can put savings aside for unexpected expenses. Unfortunately, Canadians who are more financially vulnerable are more likely to fall short on emergency savings.
Consumer debt is high, and budgets are often tight. People have credit card debt, bank loans, lines-of-credit and mortgage payments to keep up with, along with the rising costs of keeping their household running and their family supported. It’s understandable that basic and essential spending is prioritized, and rainy-day savings are put on the back burner.
Inexpensive borrowing can create a false sense of security, causing people to choose a line of credit for emergency expenses instead of a rainy-day fund.
Some people have one savings account that they think of as flexible — it could be for retirement, vacations, renovations, a new vehicle or emergencies. The downside of having one account for all savings goals is that dipping into that savings account for a family vacation or home reno can cause you to come up short when an emergency arises.
Ideally, a healthy emergency fund should have enough savings to cover three to six months of expenses. Having enough set aside to cover 12 months of expenses is even better. If you have lost income or accumulated debt during the pandemic, this amount may seem overwhelming. And if you’re living paycheque to paycheque, now may not be the right time to start an emergency fund. However, when your finances are back on track and you’re ready and able to start saving, you can begin by making small, regular deposits.
Setting up an automatic transfer from your chequing account or directly depositing a part of each paycheque will ensure that you’re regularly contributing to your emergency saving. Start with a small amount if that is what you can afford. The adage “every little bit helps” really holds true for emergency savings. Building an emergency fund that will cover your expenses during an extended illness or a longer period of unemployment takes time. Try not to get discouraged and don’t discount the value of having even $500 or $1,000 set aside for the unexpected.
Consider directing any “found” money or windfalls into your emergency fund. Your tax refund, a small inheritance, a bonus from your employer and gifted money can all help you reach your emergency savings goal sooner.
Checking in on your debt, reviewing your spending habits, refreshing your budget and cutting extraneous expenses are all part of a regular financial check-up. Take a few minutes once a month or spend a few hours twice a year to check in on your finances. Juggling expenses or changing your debt repayment strategy might create the financial wiggle room you need to add to rainy-day savings.
In other words, what happens if your emergency fund falls short?
Sometimes, even a well-padded emergency fund won’t fully cover your costs and you will need to rely on credit to get by. This can be a good strategy as long as you can afford to make your monthly payments on the new debt and have a plan to reduce and pay off this debt. But avoid using a credit card if you can—the interest rates are around 20%. Dipping into a line of credit, where interest rates are typically half of what you would pay on a credit card, is also the best route to go if you are to supplement an emergency expense with credit.
Remember that when you’re hit with a large, unforeseen expense, you can easily lose control of your budget. Covering costs with credit can provide short-term relief, but it isn’t a long-term solution. The best step you can take to avoid unwanted debt when the next emergency arises is to be prepared with a well-managed emergency fund.
Are your debt obligations keeping you from contributing to an emergency fund? Reach out to a Licensed Insolvency Trustee today to review your debt relief options.
Are your debt obligations keeping you from contributing to an emergency fund? Reach out to a Licensed Insolvency Trustee today to review your debt relief options.
September 8, 2022
An emergency fund covers unforeseen costs and helps you avoid taking on debt and the stress that goes with it. Learn 3 ways to boost your emergency savings.
