Emergency funds: Be prepared for the unexpected
Having an emergency fund can give you peace of mind. Between paying off debt, covering everyday expenses and saving for the future, managing a budget can be a big challenge that doesn’t leave much wiggle room for the unexpected. While you can’t predict the unexpected, you can plan for it. And the best way to do that is to build up a little financial cushion so you don’t have to resort to credit every time.
What is an emergency fund?
An emergency fund, also known as a “financial cushion” or “safety cushion,” is meant to help you deal with unexpected emergency situations.
For example, you could use it if your income drops because you lose your job or have health problems that prevent you from working. These funds can also cover immediate expenses when you don’t have the time or option to save.
Unlike annual purchases you can plan, such as regular car maintenance or back-to-school expenses, your emergency fund should be used in situations you often can’t avoid: an appliance breakdown, a leaking roof, dental care that’s not covered by your insurance or an emergency visit to the vet.
Reducing your financial stress
When something unexpected happens, many people find themselves turning to different types of credit with high interest rates that can quickly add up and put them in more debt. An emergency fund would allow you to reduce that financial stress and avoid quickly finding yourself in a situation you wouldn’t want to be in.
Credit is expensive
“Even though you can sometimes postpone certain payments and make temporary arrangements, it’s important to keep in mind that it can end up being expensive,” says Angela Iermieri, financial planner at Desjardins.
She recommends avoiding credit card cash advances, because you’re charged interest as soon as you take out the money: There’s no 21-day grace period like when you use your credit card to buy something.
How much should you save?
An emergency fund should cover from three to six months of fixed monthly expenses. That includes your rent or mortgage payments, groceries, phone and internet, and any financial obligations. You should ask yourself, “If my income were cut by half, how much would I need to cover the essentials?”
For example, someone who normally spends about $2,000 a month would need about $6,000 to $12,000.
Get into the habit of saving
Once you’ve figured out how much you need to save, the best thing to do is to make saving a habit by setting up automatic pre-authorized transfers from your everyday account to a savings account.
“It’s important to adjust the amount based on what you can afford and the frequency, so that it stays realistic and you can keep it up over time,” says Angela.
We have a tool that can help you calculate how much you need to save and then set up the necessary automatic deposits. Log in to AccèsD, go to My savings goals and follow the prompts.
Planning your transfers
Practical tip: Schedule your automatic transfers for the same day as payday. That way, you can just set it and forget it.
Where to deposit the money: A dedicated account to save for the future
One of the benefits of opening a dedicated savings account—such as a tax-free savings account (TFSA) or high-interest savings account—is that you can easily access it at any time.
Here are some helpful tips:
Open an account separate from the everyday account you use for day-to-day transactions.
Try to reduce or eliminate the transaction fees for your account.
Make sure there are no fees for withdrawals.
It’s never too early or too late to create an emergency fund, but the sooner you start, the more prepared you’ll be to face the unexpected.
It’s recommended that you reach out for help in certain situations, like if you want to refinance your debt or get advice on reducing your expenses and developing good savings habits. Feel free to contact your Desjardins advisor if you have any questions.