If the last few years have taught use anything, it’s that it’s good to be prepared for anything that may come your way.
No one has a crystal ball, but the future can be made more manageable, and less frightening, with the right planning. When it comes to your finances and savings, this may mean setting up an emergency fund for a rainy day – but that at times – especially now when consumer prices are sky high – is easier said than done. With a few helpful tips however, you too can start putting cash away without even noticing it’s gone and protect yourself for any eventuality.
Before we get to how to build an emergency fund, it’s important to understand what an emergency fund is and why it’s important.
An emergency fund, otherwise known as a rainy-day fund, is money you need for an unexpected life event. Life has a way of happening and you may have unexpected expenses arise. For instance, your roof could start leaking or your car could break down at the side of the road. Unless you have emergency savings to cover those expenses, you’ll need to borrow money from your family or go into debt.
When you have an emergency fund, you have peace of mind knowing that you’re financially prepared in most cases if something costly comes up.
It’s hard to save money if you don’t know what your goal is. Start with thinking of a goal you would like to save towards. It can be a family vacation or new car. By setting out a goal, you will be more encouraged to work towards it.
Personal financial experts generally recommend saving three to six months’ living expenses. That can be a lot of money though and can seem intimidating. A far better approach is to set a realistic savings goal. If six months’ living expenses are out of reach, saving $2,000 may not be. Choose a specific dollar amount that’s both achievable and realistic for your young family.
Next, you want to figure out where you want to save your money. For most families a high-interest savings account may make sense. However, in some cases you might want to keep some of that money in a regular savings account or even a chequing account, and here’s why.
A high-interest savings account can be great for making some extra money in interest, but it can take longer to transfer out in the case of an emergency. As such, for any money you might need in a short period, you’ll want to keep it somewhere that’s easily accessible. That being a regular savings account or chequing account. You may not earn as much interest, but at least you’ll be able to get the money at a time when you need it.
This is especially important for a young family, where you or your partner might be on parental leave, making money even tighter around the house.
Once you set your savings goal and know where you’re going to save your money, next you want to start saving. And the best way to do that is by making savings automatic.
Figure out how much you can afford to save from each paycheque and have it automatically go into your emergency savings fund. By doing that, it’s not as painful as personally putting in money each month. If you go the realistic route, you may not even notice it until you take a look at your savings a few months or years down the line. Just be sure to be very judicious in how you use it, so it doesn’t become yet another chequings account.
At the end of the day, no matter how you save – be it in a TFSA, through long-term debt instruments like GICs or bonds, or a simple savings account, just make sure that at least some of the funds are easily accessible in case they’re needed. You’ll thank yourself in the future.