With the current economic uncertainties caused by COVID-19, people are talking about emergency funds now more than ever. Although one can truly never prepare for a global pandemic, saving as much money as your budget allows can provide an essential safety net for when things get tough. Here are four things you need to know about emergency funds and how you can build yours.
1. What’s an emergency fund?
An emergency fund is money set aside to pay for unexpected expenses. Acting as a financial safety net, it is a critical part of financial planning and helps you prepare for unexpected expenses while limiting the risk of becoming dependent on credit cards or loans.
2. What qualifies as an emergency?
An emergency fund is different than a regular savings account, which you may use for everyday expenses or planned purchases like a new car or a vacation. An emergency fund is designed to protect you during:
- Economic uncertainty
- Job loss
- Urgent home and car repairs
- Medical expenses/medical leave
- Unplanned/emergency travel
3. How much money should you save?
According to the Government of Canada, 64% of Canadians have an emergency fund that covers three months’ worth of expenses. Although there is no set recommended amount, the money allocated to your emergency fund should be designed around your current economic situation and should limit you from feeling any immediate financial duress if you’re suddenly faced with unexpected expenses. Though it varies by personal circumstances, most experts recommend you have three to six months worth of expenses on hand in an account that you can access quickly and easily.
4. How should you build and use an emergency fund?
To kick off your emergency fund, start saving according to your annual income. It may take a while to get to your ideal amount and that’s okay! If you’re just starting out, especially in these trying times, it’s better to start small, whether it’s 10, 20, or 60 dollars a month. Setting a monthly budget that works within your lifestyle you can also help. Start by eliminating an unnecessary expense like eating lunch out every day, and instead bring lunch from home and divert the money you would be spending into your fund.
Here are some ways you can build your fund:
- Look at your current finances and separate what are essential and non-essential expenses.
- Create a monthly budget that works for you by setting aside a certain amount of money per paycheque .
- Make sure all your bills and debts are paid promptly to limit high-interest fees or collection.
- Open a tax-free savings account, a high-interest savings account or a debit account like Moya’s No-Fee Chequing Account to help eliminate temptation and keep your emergency fund distinct from your regular funds. Emergency funds should be highly liquid, so be sure to choose an account that allows you to access your money very quickly should you need it.
Need to dip into your emergency fund? Before you use some or all your funds, try determining the urgency of your situation and whether you are experiencing a real emergency or if it’s something you can put off. If it is, in fact, an emergency, don’t hesitate to use it.
Due to the surge of job losses and economic uncertainties during the COVID-19 pandemic, it’s more important than ever to bolster your emergency fund. Whether you have a long-established fund or are just starting to build one, it’s a good idea to regularly assess your expenses and see if there’s more you can put aside for a rainy day. To learn more about the ways we can help you plan for your financial future, contact us today!