Almost everyone knows they should have an emergency fund in case something unexpected happens. Potential job loss, health problems that keep you from working, and unplanned home or car repairs are just a few of the reasons why a rainy day fund is necessary.
Here are the steps to take to build your own emergency fund:
Review your spending
Before you can start saving, you need to review all of your expenses. Be sure to check your monthly, bimonthly, quarterly, and annual expenses because some of them—such as property tax, utilities, or insurance—might not be paid every month.
Once you have an idea of what your expenses are, you can determine how much you need to save. Many financial experts suggest saving between three and six months of regular living expenses.
Create a monthly savings goal
Building an emergency fund isn’t going to happen overnight unless you win the lottery. It’ll take time to build up your savings.
You can be ambitious and try to reach your goal in a year, which may not be possible unless you have a side hustle. Or it can take a few years. When you reach your goal will depend on your individual circumstances. For example, if you’re trying to save $15,000 in one year, it will mean saving $1,250 a month. If you want to save the same amount over three years, it will mean saving about $416.67 a month.
Keep in mind that if the money you save is earning interest, it probably won’t take as long to reach your goal.
Cut frivolous spending
Nearly everyone spends money foolishly, whether it be buying breakfast and lunch daily, purchasing too many clothes or shoes, or wasting food at home.
Consider eating breakfast before leaving work and making lunch, buying just necessary clothing, and purchasing only the food you need. You don’t need to deprive yourself when saving, you should just reduce any unnecessary spending.
Find the right place for your savings
First, you want to open up a separate account for your emergency fund. If the money’s in your chequing account, it will be more tempting to spend it. You also don’t want to invest in stocks because you might lose a portion of your money.
A high-interest savings account is usually the best option because you won’t lose money and you’ll earn interest on your savings. There are TFSA savings accounts, which are useful because you won’t have to pay any tax on interest earned. However, you don’t want to have your emergency savings in an RRSP because it will be considered taxable income if you make a withdrawal.
Put your savings on autopilot
Setting up automatic transfers to a savings account from a chequing account is a great way to force yourself to save. It works best when you set up transfers each time you get paid. That way the money doesn’t sit there and you’re not tempted to spend.
As your savings grow, the more interest you’ll earn. As a result, you may be able to reach your savings goal sooner.
The bottom line
Financial emergencies can happen at any moment, and being prepared for one will make your life much easier. That’s why it’s good to have an emergency fund in case something terrible happens. It’s also better than relying on a line of credit, which is an expensive option if you make a withdrawal and are forced to pay interest on the balance owing.