You should prepare for emergencies in advance since they may happen to even the most prepared people. Your entire financial plan should include emergency money as a necessary and non-negotiable component. Discover how to establish an emergency fund by following these practical guidelines:
An emergency fund: what is it?
A segregated account that safeguards you and your family from potential financial difficulties is called an emergency fund.
Here are the actions you should follow to establish your own emergency fund, together with extra advice to guarantee your success, with the assistance of our qualified financial counselors.
Step 1: Examine your bank account
To determine how much money you have available each month, track your income, expenditures, and spending for at least three normal months (not months with a lot of birthdays, summers, holidays, etc.). Reviewing your finances is crucial to staying on top of your budget and preventing overspending, in addition to providing you with a clear picture of where your money is going.
Step2: Establish an emergency fund target
Setting an emergency fund goal is crucial. Our counselors advise beginning with a small fund (about $1,000) and working your way up to a larger emergency fund (ideally, three to six months’ worth of living costs). A small fund may be used for low-cost but unplanned needs such as car repairs (tires, batteries, headlights), a last-minute journey home for a funeral or to greet a new baby, unplanned appliance repairs, replacing IDs and/or missing keys, or a few sick days. A complete emergency fund is intended for long-term unemployment or significant unforeseen costs, such as costly auto repairs or the replacement of appliances or vehicles, providing support to a family member in need, etc. Put a stop to any further investment or savings account contributions while you save for your mini fund, and continue saving until your target is met.
Step 3: Manage your spending plan
Make a strategy to assist you reach your goal based on your monthly budget. To make sure you’re contributing enough money each month to your emergency fund, what costs do you need to cut down on or how can you reorganize your financial priorities? Look for daily adjustments you may make to improve your savings and budget. Can you chose name-brand products, shop at less priced stores, or utilize coupons more frequently? Don’t forget to consider measures to increase your revenue while searching for solutions to optimize your budget. Get creative and figure out what works best for you—there are many of ways to make modest improvements every day and earn money!
Step 4: Don’t let your money be seen or thought about.
You won’t be as inclined to spend if you keep your money hidden from view. It will be harder to get to. Instead of using a bank card, do your homework and choose the finest account to deposit your funds into. You will be more cautious while handling the money in that account if you do not have a bank card. Your money shouldn’t be kept in an easily available place where it can be spent, but it also shouldn’t be kept in an easily accessible place where you can’t get it in an emergency (like investments or GICs). Excellent alternatives include TFSAs and creating a different online bank account (such as Tangerine or Simplii Financial, which have no bank fees).
Step 5: Start by paying yourself.
Treat your emergency fund like any other cost after you’ve determined how much you can reasonably put away each month and opened an account for it. To avoid having to worry, set up automatic payments just as you would for your other expenses. This will prevent you from inadvertently spending that money before you want to save it and save you the trouble of adding another task to your list of things to accomplish.
Step 6: Establish what constitutes an urgent financial situation.
The most crucial step is this one. Establish what would qualify as an urgent financial situation. Consider whether the reason you need money is a true necessity or just a “want.” If there’s no emergency, don’t take money out of your emergency fund! You have saved money in this account to help you in times of need, such as unexpected travel, sickness, necessary repairs for your home or automobile, or loss of employment. Describe for yourself what an emergency is. What “Big Scary Thing” are you trying to keep yourself safe from? What qualifies as a “need” to use money from your emergency fund? Then, take money out of your account only when absolutely necessary!
Extra advice:
- Begin modestly.
Building an emergency fund might seem impossible and intimidating if you have a tight budget, so why even try? Establish a plan that allows you to save without sacrificing your necessities. It makes no difference if all you can save is $15 from each paycheck. You’ll have $30 at the end of the month, something you never would have imagined. As you see fit, gradually raise your monthly payments.
- Discuss money with your significant other.
Make sure you have the money discussion with your spouse before beginning any financial endeavors, including setting up an emergency fund. With our free online courses, workbooks, and money coaching, Money Mentors offers a variety of methods to get this discussion started and help you come to an understanding. It’s critical to take the initiative and have financial conversations before issues develop.
- Boost your account with unexpected money
Put any unexpected financial windfalls, such as bonuses, tax refunds, gifts, GST or carbon tax rebates, or raises, into your emergency fund to increase your savings.
- Contribution to your emergency fund may need to be adjusted.
Over time, your financial circumstances will inevitably change, therefore you should make sure your emergency fund is adjusted to account for this. It’s possible that your present emergency fund won’t last you the recommended three to six months if your costs rise. If so, take another look at your monthly spending plan and see if you can boost the amount that is automatically sent to your emergency fund account.
- It is NOT an emergency fund to use your credit card or credit line.
When something unexpected happens in life, having a little emergency fund should relieve the need to utilize your credit card or apply for a high-interest loan. If your credit card earns you points or rewards for every purchase, then using it to pay for an emergency is OK; just make sure you have the funds in your emergency fund before using it. Transfer the funds from your emergency fund straight onto your credit card once you’ve paid for the emergency. This will guarantee that the situations you have been saving for don’t force you to incur credit card debt. Examining your expenditures might help identify the source of the issue if your credit card amount continues rising.
- Anything is preferable than nothing.
It’s OK if an emergency occurs before you’ve saved up enough cash for it. Use the money you’ve saved and find other sources to make up the shortfall (e.g. sell stuff, take out a loan from relatives, etc.). To reduce the amount of debt you must incur and to amass more dollars during the payment term, you may also ask the person managing your emergency for a monthly payment plan. A little amount of money in your emergency fund is preferable than none at all! After using everything you can, start again!
- Continue to save
Congratulations! However, it doesn’t imply you should stop saving money just because you’ve met your emergency fund target. Consider what else you want to start saving for when you’ve reached your emergency savings target. You’re used to live without the money you’ve been saving for your emergency fund. Have you begun to save money for your retirement? Consider TFSAs or RRSPs. Will your car someday need to be replaced? Create a savings account for that so you can either pay for it with cash or use the money you save to lessen your monthly vehicle payment if you want to finance it. Are you intending to purchase a house? Put money aside for the down payment now. It never hurts to save more money in the end.
- Enjoy your victories.
Remember to celebrate all of your successes, no matter how tiny. Take pride in your accomplishments and future achievements.
- Request assistance
Our wonderful counselors are simply a phone call away if you have any questions, are unsure of where to begin, or encounter any difficulties along the path. Make an appointment for a free consultation with one now to begin your financial journey!
