A Comprehensive Overview Of Starting An Emergency Fund
The common adage, “save for a rainy day,” isn’t just a folksy saying—it’s a crucial financial principle. However, it seems that many of us have forgotten its importance.
A quick glance at your savings account might reveal that your last surplus $20 went towards a car payment, a student loan, or a pizza. If that sounds familiar, you’re not alone. The rate of saving has decreased significantly over the years. Hence, the need for an emergency fund or a “rainy day” fund becomes essential.
This A Guide To Starting An Emergency Fund will help you navigate through this crucial aspect of personal finance.
Understanding an Emergency Fund
First, let’s clarify what we mean by an emergency fund.
An emergency fund is a particular amount of money set aside in a savings account to cover unexpected expenses. Financial experts often recommend this fund to cover living expenses during a job loss or a period of illness or injury. It can also cover unexpected house or car repairs, medical bills, legal fees, increased insurance payments, and losses due to natural disasters.
If you lack access to credit, an emergency fund can be a lifesaver. Following a bankruptcy, for example, it might be challenging to obtain credit cards or lines of credit from financial institutions. An emergency fund can help cover unexpected costs during this challenging period.
A Little Goes a Long Way
The traditional rule of thumb recommends that an emergency fund should have enough money to cover three to six months’ worth of expenses. Often, people underestimate their monthly expenses, and this figure can seem daunting.
The first step in creating an emergency fund is to evaluate your current savings, expenses, and financial goals. This evaluation will give you an idea of how much you can allocate towards your emergency fund.
You don’t need to start big. Begin by setting aside $10 or $20 a week. You can set up an automatic withdrawal that transfers money directly into your emergency fund every payday. Additionally, find savings in your budget by making small adjustments such as giving up daily coffee purchases. The money saved from these little changes can significantly contribute to your emergency fund.
Accessibility is Key
The essence of an emergency fund is its accessibility. Your money should be readily available. While it might be tempting to invest your savings in stocks, mutual funds, or RRSPs, it often takes time to withdraw your money from these investments. Some even carry financial penalties and can be taxed.
When choosing the best savings account for your emergency fund, consider the following:
- It should be a separate account from your regular savings or chequing account.
- Look for an account with no or low transaction fees.
- Find a savings account that offers interest earnings.
- Ensure there are no penalties for withdrawals from the account.
Aligning Your Emergency Savings with Your Goals
While everyone preaches the importance of an emergency fund, it is essential to align this savings plan with your financial goals. Don’t get so caught up in preparing for the unknown that you lose sight of other critical financial goals like paying down debt, saving for retirement, or saving for significant life experiences.
Emergency funds don’t form overnight. They take time, planning, and discipline. The best thing you can do is budget your income and expenses appropriately to ensure you meet your financial obligations without oversaving money that could be used elsewhere.
If you’re dealing with overwhelming debt due to a financially unprepared life event, fear not. A number of debt relief options are available to help you navigate through this difficult time.
In conclusion, starting an emergency fund might seem like a daunting task, but with discipline, planning, and some small sacrifices, you’ll be well on your way to financial security. Remember, a little goes a long way, and the peace of mind that comes with an emergency fund is priceless.
