Everyone should plan to have an emergency fund — a savings account for the unexpected. Talking to a good friend of mine, at work one day, really got me thinking. That day, as the economy was starting to head straight for the cliff, and the whole world was freaked out, he said to me “you know, I started thinking … what would I do if I were to lose my job? Have you ever thought of that?”
And to be honest, I did, but I didn’t really think about it if you know what I mean. I never thought of what I would have to do to make up for the lost income. How would I pay my mortgage? Would I be fine? I mean, I seemed financially stable. Everything was going well. But what would happen if, all of a sudden, I was handed a pink slip? Could I live on one paycheque? Probably for a while. Maybe, maybe not. At the time, I had just gotten married, but I didn’t have any children yet. I had no contingency plan. No emergency fund or rainy day savings at all.
Are you prepared?
Well, since that conversation, I’ve been slowly putting away some extra money aside. A recent Harris/Decima poll revealed that 45 percent of Canadians do not have an emergency fund, potentially putting them in trouble if some big unexpected event did happen. Everyone needs a Plan B.
In addition to your savings, an emergency fund is essential in case things go awry. This is separate from saving for your vacation or that new iPhone you’ve always wanted. We’re talking emergencies – unexpected expenses. You or your wife loses her job, your vehicle breaks down, a water pipe bursts in your basement in the dead of winter, or to pay for sudden funeral expenses. When things happen, you don’t want to be relying on a credit card. It’s always best to plan for the worst.
How do you get started?
Keep it simple. This is not a part of your finances that you want to play around with. Keep your emergency fund in safe investments, so they’re there when you need them. A Tax-Free Savings Account (TFSA) makes perfect sense for this. Or any account that gives you easy access to your funds, in case of an emergency. But not too easy, that you’ll be tempted to touch it.
Anything is better than nothing. Whatever you can put down, the important part is that you start. Starting with even $25 every two weeks will net you a cool $650, before interest at the end of the year.
Most experts suggest putting aside six months’ worth of expenses. Some say three. In the end, how much you need to save for an emergency fund depends on you. It’s whatever will make you sleep easier at night. Some suggest that you only need to include the bare minimum living expenses: food, shelter and essential utilities like water and electricity. But it’s always good to have some extra cushion, where you can. Remember, expenses that seem really easy to cut now may seem a lot harder when you actually have to commit to cutting them. This is where your budget will come in handy – how much you spend and how much you think you spend, are two different things. Set aside a goal amount and start saving!
Don’t touch it. That simple – it’s an emergency fund – only set aside for real emergencies.
Plan ahead and save yourself the grief. It will take some time to accumulate, but if you automatically deposit some money into an emergency fund every two weeks, you’ll barely notice. Make it automatic. And you’ll be thankful you did.