Blog — Wealth Wednesdays
Do you have an Emergency
8 min read
By Susan Lam
What is an Emergency Fund?
An emergency fund – sometimes called a “rainy day” fund – is a savings account where you save for life’s unexpected events and is easily accessible when you need it the most. An emergency fund is something everyone should have – regardless of occupation, financial well-being, age and so on. As an adult, it’s important to start an emergency fund because this is something you can fall back on in case financial hardship. If you find yourself unemployed (think COVID...), have an income dip or an additional expense pop up – an emergency fund can keep you mentally and emotionally secured during uncertain times.
How much should be in my Emergency Fund?
Experts have suggested 3-6 months of your current income or living expenses.
Scary right? Before you think about investing long term or saving to buy a home, you should consider starting an emergency fund. Emergency funds are one of the many key indicators of financial stability. Emergency funds allow for ease and peace of mind even when unexpected life events occur. Another thing to keep in mind is that everyone’s emergency fund is different and unique.
Expenses can include:
Phone & Internet
Rent & Living
Car & Insurance
Where should I keep my emergency fund?
Under your bed? In a shoebox? Think again. The best place to keep your emergency fund is a high interest savings account that is not linked to your debit card. My suggestion would be to look up the best rates for high interest savings accounts on www.ratehub.ca and open a separate account away from your daily banking.
Since your emergency funds are in a savings account, you want to earn a bit of interest while it's sitting at the bank. This means while your money is parked there, you can earn a bit of money via the monthly interest rate the institution offers. It should also be easily accessible when it’s needed. Most savings accounts offer eTranfers so you can transfer money out easily when you need it, or move large sums of money to your day to day account via transfer services offered by the institution.
So, this is what an Emergency Fund is...
Short term savings account that earns interest
Can be up to 6 months of expenses, depending on the individual
Accessible - you can easily transfer it into your day to day accounts
Only to be used in certain situations and unexpected events!
The bigger the emergency fund, the bigger your safety net is
…and this is what an Emergency Fund is NOT
Savings to buy things you want
To pay for a vacation or expensive item
It shouldn’t be linked to your debit card
Not a credit card or line of credit
It shouldn’t be invested in a short- or long-term investment that cannot be accessed
How can I start my Emergency Fund?
Starting an emergency fund can feel daunting and counterintuitive to some - but keep in mind, you can either start big or start small! Should I start it now? Should I start it in three months? If you ask me, the sooner the better. Here are a few of my tips on how you can start:
Save With Your Tax Return
In the spring when all adults are filing their taxes, it’s a great time to start your emergency fund because we all usually get something in tax returns.
Use Your Work Bonus
Receive a monthly, quarterly or yearly bonus from work? Use that to start your emergency fund! Instead of rewarding yourself with a fun expensive new item, why not reward your future self with financial security?
Cut Down Your Expenses
Do you buy lunch at work? Bring it instead! Do you like to eat out a lot? Buy groceries and cook at home! How many cappuccinos or lattes do you buy a week? If you can cut out one of these experiences, that $5 drink or $20 meal can go towards your emergency fund. It’s a small start!
Automate Your Savings
With each pay cheque, you can set up an automatic transfer and start small. $20 every two weeks when you get paid and gradually increase when you can! This can be super helpful because it is out of sight out of mind, it’s automatic! You won’t even notice it and soon your emergency fund will grow.
Save From Gifts
Most people have those relatives who give you cash for your birthday, Christmas, or special holiday. Instead of buying something with that cash, you can use this to start your emergency fund. Invest in yourself so you can feel financially secured.
Should I start an Emergency Fund if I have debts?
The real answer is – always pay off your large debts first. But it also wouldn’t hurt to start small. If you are paying off debts and also want to start
a small savings, you can start by stashing away
a small reasonable sum each pay cheque
The key thing to keep in mind is to always prioritize paying off your debts because at the end of the day, if you have debts, it will always have an impact on your expenses and monthly budget. For example, if you pay $300 towards your debts every month, imagine once you pay off your debts, you can add that $300 to your emergency fund! Or you can even split it up and save some for your emergency fund, and some for longer term investing like a TFSA or RRSP.
“Before you think about investing or buying a home, you need an Emergency Fund.”
During uncertain times (as we are living through today), an emergency fund is a no brainer. When it comes to reasons to start an emergency fund, here is how I see it:
If you have debts, pay off your debts first before starting your emergency fund.
You want to invest your money in the markets? Before you do that, do you have an emergency fund first? If you don’t, go back to the tips on how to start one!
You want to buy a home? Ok that’s a big question, but you want to have emergency funds to cover any unexpected fees AND also enough savings to support a down payment (which we will discuss soon!).
Start an emergency fund today, your future self will thank you.