Creating an emergency fund is a crucial aspect of personal financial planning.
An emergency fund serves as more than just a financial safety net; it provides reassurance for whatever unforeseen circumstances may arise. The primary aim of establishing an emergency fund is to potentially prevent you from accumulating debt or resorting to high-interest loans during unexpected and challenging financial scenarios. By having readily available funds, the likelihood of resorting to high-interest personal loans or accumulating unnecessary credit card debt diminishes. Although building your emergency savings may appear challenging, it becomes an attainable financial objective when you meticulously plan and set achievable milestones for yourself.
Why create an emergency fund
1. It provides a financial cushion, offering peace of mind during unexpected situations such as medical emergencies, car repairs, or job loss.
2. Having an emergency fund helps you avoid accumulating high-interest debt when unexpected expenses arise.
3. In the event of job loss or a temporary reduction in income, an emergency fund can cover essential expenses until you secure a new job or stabilize your financial situation.
4. Unexpected home repairs, medical bills, or other unforeseen expenses can be covered by your emergency fund, preventing financial strain.
It's recommended that you save three-to-six months of your income in your emergency fund.
What is an Emergency Fund
An emergency fund can take various forms, such as a designated savings account reserved for unforeseen expenses. When faced with an urgent and unplanned expense that doesn't fit into your budget, using your emergency fund is considered a preferable option compared to resorting to loans with high-interest rates, such as payday loans.
In Canada, the average interest on credit cards is 19.99%, and payday loans, as stated by the Government of Canada, can carry an annual interest rate of up to 60%. Depending on either of these options to address challenging financial situations can establish a cycle of debt, where credit cards or payday loans become the go-to solution for necessary emergency payments. Having an emergency fund can help navigate unexpected financial challenges without accumulating debt.
If you’re self-employed, it’s recommended you keep at least six months of income available, as you may not qualify for employment insurance while you’re out of work and in-between jobs.
How to create an emergency fund in Canada
1. Set a Goal:
- Determine the amount you need for your emergency fund. A common recommendation is to save three to six months' worth of living expenses.
2. Calculate Living Expenses:
- Assess your monthly living expenses, including rent or mortgage, utilities, groceries, insurance, and other essential bills. Create a budget & stick to it.
3. Choose the Right Account:
- Open a separate savings account for your emergency fund. Look for an account with minimal fees and a competitive interest rate.
4. Automate Savings:
- Set up automatic transfers from your regular checking account to your emergency fund. Treating savings like any other bill ensures consistency.
5. Cut Unnecessary Expenses:
- Identify non-essential spending and cut back where possible to increase your savings rate. Redirect the saved money to your emergency fund.
Your emergency fund savings account should also allow you to make withdrawals without penalty and ideally is also earning interest.
6. Windfalls and Bonuses:
- Allocate unexpected windfalls, such as tax refunds, work bonuses, or gifts, to your emergency fund.
7. Review and Adjust:
- Periodically review and adjust your emergency fund savings goal based on changes in your financial situation or lifestyle.
8. Invest Smartly:
- While emergency funds are typically kept in liquid and low-risk accounts, consider options that offer better interest rates without sacrificing accessibility.
9. Emergency Fund for Specific Goals:
- Consider having separate funds for specific emergencies like medical expenses, car repairs, or home maintenance.
10. Don't Dip In Unnecessarily:
- Use the emergency fund only for genuine emergencies. Avoid using it for non-essential purchases or vacations.
An emergency fund should be kept in a savings account that’s different from the regular savings account
By diligently building and maintaining an emergency fund, you can navigate unexpected financial challenges with greater ease and protect your long-term financial well-being.
Remember that creating and maintaining an emergency fund is an ongoing process. Regularly reassess your financial situation and adjust your savings goals as needed. It's an essential step towards achieving financial resilience and peace of mind.
komalvijmortgage@gmail.com I (780) 233-8500
Comments