An emergency, or rainy day fund is important when life throws you unexpected expenses. Bad things happen. You many have done everything right, but if you haven't set aside funds for emergencies, you could be caught off guard.
Over half of Canadians live paycheck to paycheck, and many people haven't had the luxury of building up their emergency savings. In this article, we'll be discussing the importance of an emergency fund and how you should approach building it up.
What Expenses Should It Cover?
Examples of unexpected expenses can include:
Big-ticket medical procedures
Major automobile fixes
What Is The Right Amount?
If you haven't started yet or you're just starting to set aside emergency funds, try to aim for $500 as a starting point. Ideally, you should target several months' worth of expenses. Generally, the more you can afford to save here, the better.
That being said, there is no set amount that everyone should have. How much you set aside should depend on your income and your overall financial health. When you set your budget, be sure to try and limit your unnecessary expenses and maximize the amount that you set aside every month towards savings or debt repayment. This way, you can slowly build up your emergency fund bit by bit, over time, without having to worry about making large one-time contributions.
Where Should I Put The Funds?
No, you shouldn't put your money under your mattress! A high-interest savings account with easy access is ideal, so that you can withdraw the funds at any time if an emergency were to pop up. Most banks and credit unions will offer high-yield or high-interest accounts, so your best bet would be to ask your bank what options are available to you.
As a plus, putting your funds in a high-interest account can earn you a higher interest rate versus a regular checking account.
Should I Just Get A Loan?
Getting a line of credit, using a credit card, or getting a short-term loan are options available to many people, especially during a time of need. However, these can be short-term crutches that can ultimately lead you to being worse off, financially, later on.
If you accumulate $5,000 worth of loans, on your credit card, payday loan, or otherwise, it will accumulate interest over time. You could end up paying far more in the long-run and end up in a debt trap. While credit is the only option that is available to some, ideally it is better to pay with cash when faced with an emergency.
How Do I Build My Emergency Fund?
Set a budget, and work towards a monthly savings goal. Many Canadians live paycheck to paycheck, and saving any money is a luxury. However, if your income level doesn't allow for large scale savings, it's important to cut down on unnecessary expenses (do you really need both Netlifx and Disney+ memberships?). If you can afford it, save as much as you can every month, even if it's a few dollars at first.
Move more money into your emergency account automatically. If your employer offers direct deposit, check with them if you can divide your paycheck between multiple accounts. By doing this, you can divert funds automatically into your savings account, without having to worry or budget for it.
Ultimately, your goal should be to save up, bit by bit, over time, so that you can make life a little easier if an emergency comes up down the line.