Emergencies can happen to the
best of us and quite unexpectedly, which is why you should plan for them ahead
of time. Emergency funds should be an integral, non-negotiable part of your
overall finances. Find out how to start an emergency fund with these actionable
steps:
What is an emergency fund?
An emergency fund is a separate
account that protects you and your family from any issue that may arise in the
future.
With the help of our experienced
financial counsellors, here are the steps you should take to start your own
emergency fund, as well as bonus tips to ensure your success.
Step 1: Review your finances
Monitor your income, expenses,
and spending for at least three typical months (not months with lots of
birthdays, summertime, holidays, etc.) so you know just how much money you have
to work with each month. It’s important to review your finances not only to
give you a clear understanding of where your money goes but to stay on top of
your budgeting and avoid overspending.
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Step 2: Set an emergency fund goal
It’s important to set an
emergency fund goal and our counsellors suggest starting with a mini fund (like
$1,000) and then working towards another full emergency fund (ideally, at least
3-6 months’ worth of your living expenses). A mini fund can be used for low
cost, but budget-derailing, expenses like vehicle maintenance (batteries,
tires, headlights), a quick trip home for a family funeral or to welcome a new
baby, unexpected appliance repair, replacing lost or stolen keys and/or ID, or
a few days off due to sickness. A full emergency fund is for extended job loss
or major unexpected expenses such as expensive car repairs or appliance/vehicle
replacement, helping a family member in crisis, etc. While saving for your mini
fund, pause any other investment or saving account contributions until your
goal has been reached.
Step 3: Work on your budget
Based on your monthly budget and
goal, devise a plan to help get you there. What expenses do you need to reduce
or how can you allocate your money differently to ensure you’re putting enough
money away each month into your emergency fund? See what changes you can make
day-to-day that can help your budget and increase your savings. Can you shop
somewhere less expensive, use coupons more, or choose no-name brands? When
looking at ways to maximize your budget, don’t forget to think about
opportunities to generate more income, too. There are so many ways to make
small changes each day and generate multiple sources of income, so get creative
and find what works best for you!
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Step 4: Keep your money out of sight, out of mind
Keeping your money out of sight
and out of mind will make it more difficult to access so you’re less likely to
spend. Do your research and find the best account for you to put your savings
into and skip the bank card. By not having a bank card you will think twice
before touching the money in that account. You don’t want to put your money
somewhere that’s too accessible that it’s easy to spend, but you also don’t
want it somewhere too inaccessible (like investments or GICs) that you can’t
pull from when an emergency arises. TFSAs or opening up a separate online bank
account (like Simplii Financial or Tangerine, which have no bank fees) are
great options.
Step 5: Pay yourself first
Once you’ve figured out how much
money you can realistically set aside each month into your emergency fund and
created an account for it, treat your emergency fund like another expense. Set
up automatic payments as you would for your other bills, so you don’t have to
think about it. This will ensure you don’t accidentally spend that money before
you save it and saves you from the hassle of adding one more thing to your
to-do list.
Step 6: Determine what you consider a financial emergency
This is the most important step.
Determine what would constitute a financial emergency. Ask yourself whether
what you need money for is an actual need or a “want.” Don’t dip into your
emergency fund if there isn’t an emergency! You’ve built up this savings
account to assist you when you need it the most―be it job loss, illness,
emergency car or house repairs, unexpected travel, etc. Define what an
emergency is to you. What is that “Big Scary Thing” that you want to protect
yourself from? What constitutes a “need” to dip into your emergency fund? And
then only pull money from your account when you truly need it!
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Bonus tips:
Start small
If you’re on a low-income budget,
the thought of building an emergency fund can seem far-fetched and daunting—so
why even try, right? Have a strategy in place that makes it okay to save
without jeopardizing your needs. It doesn’t matter if you can only put away $15
each paycheque. By the end of the month, you’ll have $30 that you didn’t think
was possible before. Slowly increase your monthly contributions as you see fit.
Talk to your partner about money
Before starting an emergency fund
or tackling anything related to money, make sure you have the money talk with
your partner. Money Mentors has lots of ways to start this conversation and
help you get on the same page with our free online courses, workbooks, and
money coaching. It’s important to be proactive and talk about money before
trouble arises.
Top up your account with unexpected cash
If you get a raise, bonus, GST
rebate, carbon tax rebate, gift, tax refund or any other unexpected financial
windfall, put that money into your emergency fund to help boost your savings.
Adjust your emergency fund contribution as needed
Your financial situation will
change over the course of your life, so you want to ensure your emergency fund
reflects that. If your expenses increase, be aware that your current emergency
fund may not cover you for the ideal 3-6 months. In that case, re-examine your
monthly budget to see if there are ways for you to increase your automatic
payments to your emergency fund account.
Your credit card or line of credit is NOT an emergency fund
Having a mini fund should
eliminate the need to use your credit card or seek a high-interest loan when
life throws a curveball. It’s fine to use your credit card to pay for an
emergency if you get points or rewards with every purchase, but make sure you
have the money in your emergency fund first. Once you pay for the emergency,
transfer the money out of your emergency fund and put it directly onto your
credit card. This will ensure you don’t go into credit card debt paying for
emergencies that you’ve already been saving for. If your credit card balance
keeps creeping up, reviewing your spending can often trace the problem to these
events.
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Something is better than nothing
If an emergency arises before
you’ve been able to save up enough money for it, it’s okay! Use whatever funds
you’ve saved up and supplement the difference from somewhere else (e.g. borrow
from family, credit, sell items, etc.) You can also ask for a monthly payment
arrangement with the person handling your emergency, to accumulate more funds
over the payment period and minimize how much debt you need to go into. Not
having enough money in your emergency fund is better than having no emergency
fund at all! Use what you can and then start again!
Keep saving
Just because you’ve reached your
emergency fund goal (congrats!) doesn’t mean you should stop saving. Once you
reach your emergency savings goal, think about what else you want to start
saving for. You’ve been setting aside money for your emergency fund, so you’re
used to living without that money. Have you started to set aside savings for
retirement? Think about RRSPs or TFSAs. Do you need to eventually replace your
vehicle? Start a savings account for that so you can pay cash for it or put as
much down when you finance to give yourself a lower monthly car payment. Are
you planning to buy a house? Start saving for the down payment. In the end, it
never hurts to save more.
Celebrate your wins
Don’t forget to recognize your accomplishments, big or small. Feel proud of how far you’ve come and how far you’ll continue to go.