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Top 4 Emergency Fund Tips

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Financial gurus frequently mention that having an emergency fund worth three to six months of your normal expenses is crucial to financial success.  With that in mind, we set out to answer the top 4 things you need to know about emergency accounts.

1. HOW DO I START?

They say a journey starts with a single step.  The same is true of creating an emergency account.  No matter your stage in life, having money available to cover both small (i.e. vet bills) and large (i.e. job loss) unexpected changes in your finances can drastically reduce your stress.  What you invest in is less important than building the funds to cover these scenarios! 

2. WHAT TYPE OF ACCOUNT SHOULD I SAVE IN?

Start by creating an account specifically for emergencies.  The key to an emergency fund is having quick access to your money without paying significant fees for transfers or being subject to a market downturn.  A high interest savings account is a good choice.  If you have room inside your Tax-Free Saving Account, you can hold your “emergency focused” high interest savings account there, which will save you money on taxes.   

**Masterclass Hack** As your emergency fund grows, you may want to keep a portion of it in your high interest savings account for smaller emergencies, while holding the other portion in a low-risk investment to take advantage of higher returns.  This option carries higher risk and is only recommended for those who have multiple months’ worth of emergency funds saved.    

3. HOW MUCH?

Set up an automated transfer from the account where you receive income to your emergency account.  How much?  Consider the amount you can afford without needing to move the money back to your primary spending account!   

**Behavioural hack** By setting the automated transfer to the same day you get paid, you may forget the transfer even happened and simply get used to living on what remains in your spending account.  As you gain momentum, think about elevating how much you save as your income grows.  For example, if your salary goes up by 5%, boost your emergency fund contribution by at least that amount.   

It may seem far away, but at some point, you will reach your 3 to 6 months’ worth of expenses goal!  Once you are there, it is time to focus your extra funds on your other financial goals. 

4. I HAVE AN EMERGENY!  NOW WHAT?

We’ve all been there.  It’s minus 40 and the furnace stopped working…  The good news is you set this money aside for a reason and now you don’t have to stress the unexpected expense!  Having a good understanding of what it will take to refuel your emergency account should be something you learned from your journey so far.  Rebuild that account! 

Want more information on building your emergency fund?  Our Conexus financial gurus are just a call or email away!  

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The importance of having an emergency fund

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Life happens and sometimes an unexpected curveball is thrown our way, threatening our financial well-being and causing stress. Having an emergency savings fund helps us be prepared for these unexpected life events.

If your furnace broke down tomorrow, do you have the money to fix it? What about if you were laid off from work, do you have money set aside to cover daily expenses until you got back up on your feet? Or what If you got hurt while playing a sport causing you to be off work for six weeks, would you be able to cover your mortgage payments, bills, groceries, etc.?

Life sometimes throws us a curveball, threatening our financial well-being and causing us stress. An emergency savings fund helps us be prepared for those unexpected life events.

What is an emergency savings fund?

An emergency savings fund is money you’ve set aside for life’s unexpected events such as the loss of a job, a debilitating illness or injury, or a major repair to your home. It provides you with a financial safety net and gives you comfort knowing that you can tackle any of life’s unexpected events without adding money worries to your list.

What if I don’t have an emergency savings fund?

Without an emergency savings fund, you’re living on the ‘financial’ edge, hoping to get by without running into a crisis. If an emergency does happen, it can cause a little problem to turn into a big, expensive financial situation. It can also cause a lot of additional stress.

As well, without an emergency savings fund, many people turn to debt instruments such as credit cards and lines of credits, to help cover costs. Depending on your financial situation, this could cause even more money worries as it’s only a short-term solution.

How much money should I save for an emergency?

When looking at the amount you need to save for an emergency, a good rule of thumb is three to six months’ worth of expenses. Calculate this amount using a budgeting tool. Over a few months, track the amount you’ve spent on your needs including housing, utilities, food, insurance, transportation, debt and personal expenses. Once you’ve completed this, you should have a good idea of the amount you should set aside for emergency purposes.

How can I save for an emergency?

Making regular payments into a savings account each payday is the simplest and most effective way to save money. It may not seem like a lot to begin with, but don’t let that discourage you. Over time, if managed properly, the fund will grow to the required amount.

When should I use my emergency savings?

When determining whether to use your emergency fund, ask yourself the following three questions:

1. Is it unexpected?

An unexpected emergency is one that you didn’t anticipate occurring, such as:

  • Loss of a job;
  • A debilitating illness or injury; or
  • Major repair to your home or vehicle caused by circumstances out of your control.

Annual reoccurring expenses, such as property taxes, would not qualify as an unexpected emergency.

2. Is it necessary?

Needs are often confused with wants and you’ll need to determine if the unexpected emergency is a want or a need. For example, if you have a water leak in your kitchen and you have to put in new flooring, this could be considered a need or an emergency. On the other hand, if your flooring is old, and you want an updated look, this would be considered a want and you’re emergency savings should not be used.

New items are great; however, your emergency funds should not be used for them.

3. Is it urgent?

When an immediate need arises, the last thing you want to worry about is how you’re going to pay for it. When making a decision on whether the expense is an urgent need, determine if it will affect your ability to provide the basics for you and your family.

Remember, the money you have set aside should only be used if you have an unexpected, immediate expense. If you do use money from your emergency savings, be sure to replenish the money as soon as you get back on your feet by making regular payments.

Life may throw you curveballs, but being prepared will give you peace-of-mind knowing you have money set aside for those unexpected events. It will also help your overall financial well-being and reduce stress.

Are you prepared for an emergency? We’d love to help you get started – contact us today!