There’s nothing worse than working hard to build financial stability, only to see it crumble due to unexpected expenses.
Why build an emergency fund?
- You had money set aside in an account to replace your aging car, but the roof of your house started leaking. You empty your savings account to replace the roof. An emergency fund would have allowed you to have money set aside for this unexpected expense AND to buy a new car.
- If you lost your job or got sick, you’d need cash to pay for everyday expenses (groceries, rent, etc.) An emergency fund would give you something to fall back on and peace of mind while you look for a new job or take the time to recover.
- Everyone, including financial planners, will tell you that having an emergency fund is essential. As to the amount you should have in it, it is almost always the same: the equivalent of 3 months worth of living expenses.
How to build your emergency fund
- Save by instalments. Authorize your financial institution to transfer a set amount from your chequing account each month (or each week, if you prefer) to an investment account, a plan that can be easily converted to cash (a TFSA, for example) or a high-interest savings account. This way you can build your emergency fund gradually without having to go make deposits in person.
- Be aware that the amount you choose to set aside each month is not as important as simply saving on a regular basis, and above all, don’t go into your emergency fund unless it’s an emergency. A couch on sale you suddenly cannot live without is not an emergency.
How to get started
Start by saving the equivalent of one month’s worth of groceries and then work on the other monthly expense categories one month at a time.
With each paycheque, try to put aside the equivalent of 5% to 10% of your income (if you can). Don’t forget to put it into a separate account so you’re not tempted to dip into it.