If the events of 2020 taught us anything, it鈥檚 to be prepared for the unexpected. Staying resilient in times of adversity is one of the greatest strengths a person can have, and this is particularly true in regards to personal finance. The manner in which someone is able to weather a financial shock can be defining in that person鈥檚 life. By that, we mean that while some people move on from financial emergencies relatively unscathed, others suffer negative consequences long after the initial event. What usually separates these two groups of people is preparedness; the people in the former group had an emergency fund to fall back on, while the latter did not.
An is a pool of savings meant to be used only in the event of a sudden financial shock. This could be an unexpected medical bill, unplanned car repairs or a sudden loss of income (ultimately, anything that results in a significant, unplanned expense for you). If you鈥檝e diligently saved in an emergency fund leading up to the point of such an event, you鈥檒l already have a source of liquid cash put aside to help you cover whatever costs you may incur. An emergency fund should not be used to cover planned expenses, like rent and groceries, and should also be seen as distinct from your general savings.
Having a dedicated emergency fund is important for a number of reasons. For one, as mentioned above, having a fair amount of emergency savings means you鈥檒l be able to move on after a financial shock; bouncing back to your regular lifestyle won鈥檛 be such a difficult task. Research from the AARP suggests that, that household will be dramatically less likely to suffer serious financial hardship over the next three years. Second, having an emergency fund will offer you some peace of mind when it comes to your money. over their finances, and if their pay was late. Financial stress is pervasive in our country, and living your life concerned about money means you don鈥檛 get to truly enjoy the things you love. If you can reduce that stress, even just a bit, by putting money aside for emergencies, you鈥檙e doing your future-self a huge favour.
Finally, having an emergency fund protects you from having to take on high-interest debt in the event you do face a financial emergency. If you鈥檝e got nothing to fall back on when you need money quickly, you鈥檙e likely going to have to turn to credit to cover the gap. Adding a massive amount to your credit balance will put you in a position where you鈥檝e got to devote the bulk of your income towards paying off your credit card bill (which is particularly tough if you already had a balance you were working on paying down). You may get hit with high interest fees in the process as well, increasing the size of the financial hole created by the initial shock. Even worse, if you don鈥檛 have enough credit available to cover your costs, you may have to turn to an undesirable option like taking out a pay-day loan. These kinds of loans are known for their extremely high interest rates and are considered predatory by many; they often create a cycle of debt that鈥檚 hard to escape once you鈥檙e in it.
Determining how much you need to save in an emergency fund is personal, as it depends on your individual financial commitments and/or lifestyle. In general, it鈥檚 recommended that you save (they tend to be quite similar). However, it鈥檚 important to note that reaching this level of savings is a medium-term financial goal for most, meaning you won鈥檛 be likely to achieve it under two years. Instead, start with saving towards a smaller figure, like $1000, as your emergency fund target and grow from there. Aiming for a smaller number is going to feel much more achievable, and you鈥檒l be less likely to feel overwhelmed and fall off track along the way.
Ultimately, having an emergency fund is one of the best ways you can look out for yourself and your dependents, if you have any. It鈥檚 prudent to be prepared for your next financial emergency, because it will inevitably happen; it may be next month, next year, or five years from now, but you鈥檒l eventually face some kind of problem that鈥檒l require a considerable amount of money to fix. Much like you鈥檇 create a will to ensure your assets are taken care of when you鈥檙e gone, it鈥檚 important to create an emergency fund to ensure you鈥檙e prepared to take on a financial shock and move on without experiencing any major, negative consequences.
If you鈥檝e never had an emergency fund before and you鈥檙e looking to get started, here are a few tips that鈥檒l help you get your fund growing ASAP.鈥
Separate your Savings
鈥Whether it鈥檚 for your general savings or for your emergency fund, in order to save effectively, you鈥檒l need to have a dedicated savings account. This is because it鈥檚 just too easy to deplete your savings if they鈥檙e mixed in with your day-to-day spending money; the urge to spend is real if that extra money is too easily accessible. Instead, you need a separate account to hold your savings, and should even consider having two separate savings accounts (one to hold your emergency fund and another to hold your general savings). If you let your emergency fund live amongst your general savings, there鈥檚 still a risk of mindlessly depleting too much of it as you use your savings. In that case, you might put yourself in a position where you end up having to take on high-interest debt in the event of an emergency after all.
If you鈥檙e looking for a home for your emergency fund, you should consider starting an account with . is a Canadian mobile app that offers its users access to the Vault, a secure account where they can store their extra savings for free until they need them. Plus, users can earn a cash incentive worth 2% of the total they save when they complete any Saving Challenge. That鈥檚 competitive with (and probably more generous than) the interest rates offered by your bank today.
Save Right Away
鈥If you鈥檙e waiting until the end of your pay period to save whatever you have leftover, chances are, you鈥檙e not saving very much. Instead, learn to save right after you get paid by sending a portion of your pay over to your separate savings account right after you receive it. Of course, you鈥檒l need to leave yourself enough to cover your essential expenses for that pay period, like rent and groceries, but once those are covered, you鈥檒l have a clear idea of how much you can afford to save. It鈥檚 much easier to save a significant amount of your disposable income before you鈥檙e faced with the temptation of non-essential purchases through the rest of your pay period. Of course, you鈥檒l still need to work to avoid going overboard with spending between pay periods, but this strategy will help immensely when it comes to reducing mindless spending.听
Automate Your Savings
鈥One of the best ways to ensure your savings are growing as fast as they can is to automate your saving process. Even though the act of saving itself is not particularly difficult, if you take the manual task of saving and automate it, you鈥檙e going to have a much higher success rate than if you leave it to yourself each payday. That鈥檚 because the act of saving won鈥檛 rely on your memory, or perhaps more importantly, your emotions. If the saving process is already handled, you don鈥檛 have a chance to trick yourself into saving less than you should.听
So, select an amount you feel you can comfortably put towards your savings (ideally, one amount for your general savings and another for your emergency fund) each pay period and automate it to move to your separate account/s. This is another area where can help you make simple and effective changes. users have a ton of flexibility in terms of how they鈥檇 like to save; popular choices include rounding up to the nearest dollar on coffees or saving a percentage of a payroll deposit. Once you鈥檝e set your Saving Rules, handles the rest.
Focus on Your Emergency Fund First
鈥Finally, if you鈥檙e just starting your saving journey, focus on building your emergency fund first before turning your attention to really growing your general savings. Of course, sometimes it鈥檚 easier to save towards a fun goal like a vacation or a new car, but that money is going to go towards resolving a financial problem anyways if one occurs and you don鈥檛 have an emergency fund. Once you have the financial buffer created by a well-tended emergency fund, then you can safely turn your attention towards your other goals with the knowledge you and your dependents have a financial lifeline if you need it.
Ultimately, we hope this guide helps to solidify why it鈥檚 so important to have an emergency fund. Some people like to say that life is really defined by the roadblocks that arise along the way and the manner in which we get past them. Having an emergency fund exemplifies this idea, and highlights how taking the time to think ahead and prepare accordingly can make a massive difference in life. You have nothing to lose by starting an emergency fund and everything to gain, so why not get started?
If you鈥檝e still got questions about emergency funds, check out .
is Canada鈥檚 best money saving app. If you鈥檙e looking for more information on how it works, how to get set up, the rewards available to users and more, visit.听
