Financial emergencies can happen at anytime without notice or warning. Two-thirds of Canadians have some form of an emergency fund to cover unexpected expenses but one-third don’t. In times of uncertainty there may be increased financial pressure on you. In times of rising interest rates and increased mortgage payments, having extra savings to tap into may help meeting a shortfall. Regardless of your personal financial situation, having easy access to money when life throws you a curve ball will increase your peace of mind and confidence. Let’s take a closer look at the bigger picture of what having a rainy day fund means to you.
What is an emergency fund?
An emergency or rainy day fund is money you set aside and have easy access to in the event of an unexpected expense. According to the Financial Consumer Agency unexpected life events can happen at any time and catch people off guard. And when these event happen, you may have very little time to react and to adjust your budget. Many of us will turn to credit cards to fund short term shortfalls but interest can add up making it an expensive proposition. According to Nerd Wallet using your credit card can increase your debt and increase your financial pressure at a time when you don’t need anymore added pressure. And, you may not have the income in the future to pay it off the additional credit card debt creating even more stress.
How much money do you need to have in an emergency fund?
According to a news report released by CNBC and data provided by leading Economists, they suggest have enough savings in your bank account for three to six months of living expenses. The money should be easily accessible and be there to help you manage through difficult times such as a job loss, salary cut, or health-related issues.
Track your spending
Most of us are really unaware of how we spend our money. In fact, we may make mindless decisions with our money spending it on unimportant things. Making mindless decisions with our money may create short term bliss or satisfaction but can have a long term impact on our financial well-being and security. It’s essential you understand what triggers your spending including your thoughts, feelings and actions around your money choices. The best way to do this is to create a spending plan or budget to track how you spend your money.
Where should you put your emergency money?
Hiding money under a mattress is still a thing, but experts suggest there are better places to keep your money safe, away from the temptation to spend it. According to Money Sense, there are many options for you including a Tax Free Savings Account or High Yielding Interest Savings Account. It really depends on your personal situation. Speak to a financial professional or call your financial institution for guidance.
How to get started?
RBC or Royal Bank has a really cool Emergency Fund Calculator. Try it. However, initially you may feel a little overwhelmed by the suggested emergency savings amount (I was surprised). But remember, you don’t have to boil the ocean because you can start building an emergency fund starting with $50 and increase it accordingly.
At the end of the day, having a goal centered approach to your life and your money will help you to stay focused on what really matters. Unexpected life events will happen. Be ready.
Updated: March 2, 2023