How to launch your emergency fund

Saving money in an emergency fund means you can cover unexpected expenses without incurring debt.

For many Canadians, the pandemic highlighted the volatility of their personal finances. A million jobs were gone seemingly overnight in the initial months. More than 2.5 million people took advantage of emergency government assistance, with an estimated 1.5 million still relying on government benefits 19 months after the first shutdown. Many lost their jobs or their businesses permanently.

But it doesn’t take a once-in-a-lifetime global pandemic to throw you off course financially. Life is full of surprises. Unexpected expenses like home or auto repairs, an urgent trip or a sudden job loss are realities that can derail your financial health.

Why do you need an emergency fund?

An emergency fund helps you to self-insure against these chance occurrences. It’s separate from other savings you may have for that next great vacation or a mortgage down payment. Your emergency fund is money that’s there when you need it, so you don’t have to rely on credit debt to get through rough patches financially.

How much money should you save in your emergency fund?

The amount you set aside in your emergency fund depends on your lifestyle and your budget. Set an initial goal to save $1000. Following that, aim to save three to six months of household and personal expenses.

Prioritize building your emergency fund, even if you’re simultaneously paying down debt. Borrowing from your own account at 0% interest is much cheaper than racking up further debt through a credit card or line of credit if something unexpected happens.

Kickstart your emergency fund

Start small. Write down an initial savings goal and examine ways to start building your emergency fund.

Review your existing budget. See if there’s anything excessive that can be cut back. You may have subscriptions you no longer use or excess items to sell. Small spending reductions can give your emergency savings a boost.

Get a side hustle. Can you get a part-time job or start a business to help launch your savings? The gig economy is ripe with opportunity.

Decide how much to save. It could be a percentage of your discretionary spending or a set amount – say, $50 per paycheque. Set a target that works for you.

Automate your savings. Once you know how much you’ll save each pay cycle, have the money taken out of your chequing account on pay day. It’s possible to set up a payroll deduction or an electronic funds transfer. The idea is to get the money for your savings out of your chequing account before you’re tempted to spend it.

Turn saving it into a game. It’s human nature to rise to a challenge. Make saving fun with the 52-week step-up saving challenge? Start the first week in January, by saving $1, followed by $2 the next week, and $3 the week after that. Increase the amount by one dollar weekly until you’re saving $52 in the final week of December. By the end of the year, you’ll have saved $1,378!!

If you don’t trust your future self, try the method backwards. In week one, save $52, then $51, and so on, so you only need to save $1 in the final week of the year. If you invest your money, you may earn more interest by saving larger amounts of money earlier in the year.

Where do you save money for an emergency?

That depends. Some people are most comfortable putting aside money in a high-interest savings account. On the other hand, there are many benefits to investing the money. Investing in a tax-free savings account (TFSA), for example, helps you take advantage of higher interest earnings. Talk to your advisor about the best fit for your risk profile and needs.

Keep in mind, this is your emergency fund, which means you need the money to be accessible in the event of an emergency. Talk to your advisor about the best savings options to:

Ensure you can get cash when you need it, (but not so easily that you can use it to buy potato chips).
Don’t pay penalties on withdrawals
Can easily replenish the fund after you’ve drawn from it

Although money is generally safer in a bank account, try saving anyway to get into the habit. Start by saving toonies in a peanut butter jar if it works for you, or stash bills under your mattress. The important thing is to make sure you’ve got a plan and get started today. Your future self will thank you.

Contact your SISIP advisor today to review your financial plan and set you on the path to financial health.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by SISIP Financial, for the benefit of SISIP Financial a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

Emergency Savings Calculator

This calculator helps you determine how much emergency savings you may need, and how you can begin saving toward this important goal.

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