Conventional wisdom says you should always save some money for an emergency.
The amount is up to you. On the most conservative end, experts recommend you save the equivalent of three-to-six-months’ salary in case of a sudden loss of income. More laissez-faire saving advocates will tell you to save enough money to cover your household expenses through the same time period, but without factoring luxuries like meals out and entertainment. Basically, have enough to pay rent and utilities for a few months.
For many people—myself included—being able to save six months’ salary is something that would be nice to do if they won the lottery, (meaning the real lottery; a scratch-and-win probably wouldn’t cut it). Instead, I use an alternative savings strategy.
Before we get started, I should make a confession. In my house, my wife Amanda is the one who keeps us on track. She insists on making sure our credit cards are paid off, and some money from every paycheque goes to savings. Her discipline is the reason this plan works, and it can only work if you’re budgeting carefully and being honest with yourself about your money.
Step one: open a high-interest savings account
Emergency saving is about one thing: quick access to cash. That’s why I love having a high-interest savings account (HISA). GICs are great for long-term savings goals, but lack flexibility if you need to make an unscheduled withdrawal. Tax-free savings accounts are good options, but have complexities around contribution room if you need to make a lot of withdrawals. With a HISA, you can earn some interest on your savings and still have unfettered access to your money whenever you need it.
Step two: save a little bit every time you get paid
So many financial experts talk about monthly expenses, but I find it’s a misnomer. I get paid semi-monthly, but our mortgage and car payments are due bi-weekly. The hydro bill comes every other month for some reason, and the gas bill looks a lot different in January than it does in June.
When you’re making a savings plan, think about how much you get paid, how often you get paid, and how much money you typically have left over when the next cheque comes in. For us, the schedule that seems to work is $200 from every paycheque. Find the amount that works for you. There’s no harm in adjusting how much you save to make sure you can cover your day-to-day expenses.
Step three: know what you’re saving for
We use this spreadsheet to keep track. It’s not pretty, but it works. Our goals include money for the holidays, an upcoming vacation, a family event, and emergency cash for unexpected home repairs, car repairs, and veterinary bills. We spread each deposit across the different categories, prioritizing based on the expenses we know are coming up. The result is a bunch of mini-balances within one savings account. For example, we’ve saved much more for a home repair than a car repair because it’s much more likely a home repair will cost thousands of dollars all at once. Now that it’s October, we’ll start putting a little more toward holiday savings than we have been so far this year.
Step four: use your fund
The thing they don’t tell you is emergencies aren’t always one-time, big, sudden expenses. A broken water heater isn’t a one-time lump sum to fix. It’s a few hundred for the first plumber’s visit, then a few hundred more for the next plumber’s visit to see if it can be fixed again, and then the replacement. And if it’s been leaking, maybe an inspection for mold.
When something comes up, use your savings. That’s what it’s there for, and your daily finances won’t be impacted if it’s a large or small amount.
Here’s what I love about this system. Let’s say a few months go by and you’ve saved up $1,000 for a vacation, $500 for car repairs, and $500 for home repairs. Now imagine the water heater fails, and you’re out $1,200 for a new one. Even though you haven’t saved $1,200 for a home repair, you still have the money since you’ve saved $2,000 total. With this system, you can borrow from yourself, and you always know where you stand. Just make sure you work to rebuild your savings, and don’t stretch your HISA so thin that you’re not actually saving anything at all.
Most importantly, use your savings before reaching for your credit card or a personal loan. The cost of borrowing is so high, you will save money in the long run by using up your savings first. It’s your money. You’ve saved it. So use it!