✔ All individuals and families have different needs for an emergency savings fund
✔ A small amount of savings is always better than none
✔ Look for high interest savings options that help separate and grow your money
If the past few months have taught us anything, it’s that anything can happen. Life comes at you fast, and there’s no way to predict all of the challenges and opportunities that lie ahead. Now more than ever, Canadians are thinking about securing their family’s future by setting aside money for a rainy day (or a rainy six months, if we’re talking about the year 2020). An emergency savings fund can make all the difference between surviving and suffering when faced with serious financial hardship. Here’s a look at why savings are so important, how to build them and where to get support in the meantime.
Why do I need an emergency fund?
There are plenty of reasons to build an emergency savings fund, from sudden income loss to unforeseen expenses related to your house or vehicle. The majority of Canadians live paycheque to paycheque, which means a large car repair bill or broken furnace can be a major financial challenge. Long-term income loss can be devastating for families if there are no savings to fall back on - something that many Canadians are dealing with now, during the COVID-19 pandemic - and even the most budget-conscious individuals cannot predict personal or economic challenges to come.
When you have an emergency savings fund, financial hardship can be a bump in the road instead of a major catastrophe. Emergency savings create a safety net that allows you to manage the situation at hand while carrying on with your life. While your emergency fund may not cover all unexpected expenses, every little bit helps. A small weekly sacrifice now can mean huge relief down the road - trust us, it’s worth the effort!
How much should I aim to save in my emergency fund?
This is a bit of a trick question because an accurate answer will depend on a number of personal factors including your income, lifestyle, job security, monthly expenses, the dependents in your family and more. As a general rule of thumb, many financial experts recommend saving enough money to cover six months of typical expenses in case of sudden income loss. This includes all bills, mortgage or rent payments, living expenses and other necessary costs. For example, if your monthly expenses are roughly $3500, you’d want to aim for just over $20,000 in emergency savings. If this number seems unattainable, don’t worry - unless you’re wealthy, it’s a real challenge to hit that goal. Instead, try aiming for three months as a starting point. Still daunting? Don’t despair - start small and keep at it. Remember that some savings is better than none, and when left untouched, this money will grow over time.
I don’t have a very high income - how do I build savings?
Creating an emergency savings fund relies heavily on three things: time, dedication and patience. Start by setting up a bank account that’s dedicated to your emergency fund. Ideally, this will be a high interest account or one with minimal service fees. You may want to consider utilizing a TFSA, which makes an excellent savings vessel. Avoid investing within these funds, as this can lead to ebbs and flows in your account balance. Do not place this money in an account that incurs tax penalties upon withdrawal (an RRSP, for example) as those fees will seriously eat into your savings.
Once you’ve got a dedicated emergency savings account, set up an automatic transfer from your everyday banking to your savings fund that coincides with your regular pay day or the first of the month. Aim to save as much as you can, but know that every little bit helps. An automatic transfer of $10 per week will net you $520 in savings in a single year. If you can make $25 or even $50 a week work on your budget, the savings will add up very quickly. When left to grow, that sort of money creates a sizable emergency fund (not to mention the peace of mind that comes with it).
An emergency fund should be used for just that: emergencies. This means dipping into your savings for things like a new roof or winter tires, but not for a vacation (you’ll need to save or borrow for that separately). Remember, whenever you use money from your emergency fund, make an effort to rebuild those savings as efficiently as possible— you never know when you’ll need to dip into savings again, and you’ll want to be prepared.
Looking for personalized financial guidance? We are here to help.
If you’ve come across financial hardship and don’t have emergency savings to fall back on yet, you’re not alone— and we can help. For information on personal loans or general financial advice, please reach out to your local easyfinancial branch or easyhome branch, or give us a call at 1-888-502-3279. We are here to help.