Date

October 20, 2021

Why you need an emergency fund

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

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Why you need an emergency fund

Why you need an emergency fund

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.  

3 reasons you might not have an emergency fund

1. Bills and debt repayments come first

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.   

2. Interest rates continue to be low

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.  

3. Savings is viewed as a ‘catch all’

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.   

How much should you have in your emergency fund?

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. 

3 ways to boost your emergency savings

1. Set up automatic 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.  

2. Save your financial windfalls instead of spending them

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. 

3. Schedule regular financial check-ups

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.  

What 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 cards or a line-of-credit. If you’re trying to reduce your debt load after the crisis is over, it’s important to understand your options. A Licensed Insolvency Trustee (LIT) can help by reviewing your situation and providing information on all available debt solutions, including budgeting, debt repayment strategies, credit management, debt consolidation, credit counselling, a consumer proposal and bankruptcy 

Choose emergency savings, not debt

When you’re hit with a large, unforeseen expense, you can 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.  

Do you have more questions?

Date

October 20, 2021

Why you need an emergency fund

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

Share
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