Updated: Feb 10, 2022
Most people don't like to think about those "what if" moments, and I don't blame them! Honestly, playing the "what if" game can lead you down a never-ending black hole of uncertainty. But, life happens, and those "what if" scenarios can become your new reality at any time. Despite this, Nearly 40% of Canadians don't have the financial means to cover a financial emergency. It's time we change this.
A financial emergency can look like anything from a job loss to car trouble, from sick parents to a sick pet, and other nightmares. An emergency fund is a buffer we need to offset these unwelcome surprises. It means the difference between comfortably looking for a new job after an unexpected job loss and getting evicted from your home because you can't pay your rent. I know going over these scenarios can be daunting, and the purpose of this post isn't to scare you; it's to prepare you.
So, with that being said, let's get prepared!
First things first, what is the difference between an emergency fund and your regular savings? And, why is it necessary to keep them separate?
It's pretty simple, your emergency fund is your life-jacket; it's there to bail you out of jail (I mean figuratively, not literally!). While your savings is for that sweet vacation you've been planning, or that cool course you've been dying to take. Keeping them separate is important because they each have different purposes. Combining them means that when an emergency arises, you're now taking money away from your goals or - worse - you don't have enough to cover your emergency.
How much is enough?
Ideally, you should have 3-6 months' worth of expenses saved up. I know that sounds like a lot, but keep in mind that it's only accounting for your basic expenses (not your shopping and dining sprees!): rent, food, transportation, etc. So, if your monthly expenses are $2,000, you should aim to have $6,000 - $12,000 in your emergency fund.
Great! Now, how do you build your emergency fund?
It's easy - build it into your budget! You can do this either by aiming to put a percentage of your paycheque or a set dollar amount towards it. You're in control; you decide how much and how often. A tip that will help you stick with this: automation. Have your chosen amount automatically transferred to your emergency fund! This way you're building your safety net without even thinking about it.
Finally, where should you keep your emergency fund?
Definitely not under your mattress or in your freezer! Jokes aside, you want it easily accessible. This means a non-registered account and no long-term investment vehicles. I would suggest either an interest-bearing savings account or a redeemable GIC.
And that's it! Having an emergency fund is how you take care of your future self. I hope you never have to use it. However, better to have it and not need, than need it and not have it.