How and Why to Start Building Your Emergency Savings Today

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Have you set aside money to cover a financial emergency or unexpected expense? Sometimes life may throw you a financial curveball that you just didn’t see coming – such as a job loss or illness. If you can’t pay for these bills from your savings, you could end up with stressful financial struggles. Start building your emergency savings as one of the first steps in sound financial planning.

How Much Money To Keep in Your Emergency Savings Fund                                                                    

The amount to keep in emergency savings varies according to your situation and financial responsibilities. However, many experts suggest at least three months living expenses (and preferably six months) is a good amount.

What Is An Emergency Savings Fund?                                                                                    

An emergency savings fund is an amount of money set aside for unforeseen financial emergencies or issues that aren’t part of your regular monthly budget. Emergency savings typically help pay for things like:

  • Living expenses in the case of job loss
  • Living expenses for extended time off work due to illness or injury not covered by insurance
  • Unexpected home repairs (such as replacing a furnace)

Emergency savings may also be called a “rainy day fund” or a “slush fund”.

Why You Need An Emergency Fund

When an unexpected financial situation occurs and you don’t have an emergency fund, you have to find other means to cover the costs, and this adds stress and an additional burden to your finances. Surprisingly, a Forum Research study published in late 2017 found that 26% of Canadians don’t have any emergency savings!

Without an emergency fund, expect to pay interest if you use a credit card, line of credit, or loan to pay for the surprise costs. Or you may have to borrow from a family member, take on a second job, withdraw from your RRSP (and pay income tax on the withdrawal) or sell household items to come up with the cash you need.  

An emergency fund is a better choice that protects you from the worry and additional costs associated with any of these options.

How To Jumpstart Your Emergency Savings

Start building your emergency savings by setting a goal of at least three months living expenses. Then review (or create) your monthly household budget and include a category for emergency savings.

Look for ways to jumpstart and build your emergency fund faster with lump sums such as:

  • Cash birthday or holiday gifts
  • Income tax refunds
  • Selling unwanted/unused household items
  • Work bonuses
  • Allocating any raises or overtime pay to your emergency fund

Once you calculate the monthly amount available to save towards emergencies, set up an automatic transfer to simplify your savings contributions.

Where To Keep Your Emergency Money

Collect your emergency savings in a high interest daily savings account for quick and easy access, or the cash portion of a Tax Free Savings Account where your savings grow tax-free.

Use an online savings calculator to compare how fast your savings will grow based on contribution amount and interest rate.

If you’re a Canadian adult who has financial responsibilities, you need emergency savings so you can meet your obligations when faced with unexpected money issues. Don’t delay – talk to a Investment Professional today about getting started building your savings.