Start an emergency fund in 5 easy steps

Start an emergency fund in 5 easy steps

If you consider yourself a spendthrift, here are 5 tips to help you save up for a rainy day.

Raise your hand if you have disposable income!

According to Statistics Canada, household debt in Canada was 167.3% in 2016.

This means that for every $100,000 in income, families owe $167,300.

This means that most people are skirting around dire financial straits, hence the importance of having an emergency fund.

Why do I need an emergency fund?

In this context, an emergency is an unexpected expense or loss of income:

  • Leaky roof
  • Lost job
  • Illness or injury preventing you from working
  • Death
  • Etc.

An emergency fund enables you to pay for something unexpected without having to go into debt or turning to high-interest lenders.

This fund is not for recurring expenses, like municipal taxes, new tires or school fees.

All recurring expenses must be covered in your budget.

How much should you put away?

Approximately 3 to 6 months of your net salary.

To help you calculate the amount you need, ask yourself this question: If I lose my job, how much time will I need to find another one?

You also need to know exactly how much you need to cover your basic living expenses:

  • Mortgage or rent
  • Groceries
  • Car or public transportation
  • Medical expenses
  • Daycare
  • Etc.

If you’re in a two-income living situation, calculate how much of your salary goes to paying these expenses.

An emergency fund in 5 steps

You now have a savings objective… this how you attain it:

1. Open a savings account

Opening a savings account to use strictly as an emergency fund is far better than just stockpiling your money in an account. This will make it easier for you to stick to your savings target.

There are several options, and depending on your needs and investor profile, you could choose to invest in:

Check with your advisor to determine whether it’s better for you to invest in an RRSP or TFSA.

Always base your decision on the following:

  • How easy and quick is it to withdraw money in case of emergency?
  • What are the transaction fees?
  • What are the penalties for withdrawals?
  • How risky is the investment?

Is a risky investment worth it?

It may be tempting to want to invest in a potentially high-return investment because it could help you reach your savings target quicker.

However, it may be better to play it safe, even if it means taking a little longer to save up 3 to 6 months of your salary.

Depending on how much you’re planning to invest, you may want to invest half that amount in a safe investment and the other in a high-risk one.

Talk to your advisor. They will be more than happy to find the best investment solution for you, while considering your investor profile.

2. Set an amount to save

Based on your budget, calculate how much you can afford to deposit into your emergency fund every week or month.

Unfortunately, this amount may seem insignificant when compared to the amount you actually need to save.

However, don’t get discouraged. Slowly but surely, you’ll grow your fortune.

The important thing is to start building an emergency fund as quickly as possible and let the interest accrue, which will give you all the extra push you need.

Are you having trouble finding money for your emergency fund? It’s time to go back to square one and examine your budget in detail. Try cutting down on your spending to free up some cash for your savings. Several options are available depending on your priorities.

3. Develop a savings habit

The best way to build an emergency fund is to opt for automatic money transfers, ideally as soon as your paycheck is deposited.

Isn’t it easier to put away $25 per week than to fork down $1,300 per year?

If your savings strategy relies on your spare change, then put it in a jar. But don’t go fishing into it!

4. Have self-control

Resist the temptation to pilfer your emergency fund for non-essential, short-term needs.

If you don’t, you could find yourself deep in debt should you be forced to pay an unexpected expense.

5. Revise your strategy

Life moves fast and at any moment, a dire financial or household situation could have a negative effect on your budget, for example:

Be sure to reassess your savings objectives whenever a life event happens.

Remember that whenever you’re forced to rebalance your budget, don’t sacrifice your emergency fund too hastily – give it the credence it deserves.

Note: This blog post is provided for information purposes only. It is not a substitute for professional legal, financial or fiscal advice. For advice specific to your personal situation, always speak with your advisor. SSQ cannot be held responsible for any decision made as a result of reading this blog post.