Rights & Money

Why You Need an Emergency Fund

Saving for a rainy day is more important (and easier) than you may think

 

By Matt Smith

 

 

How much money do you actually have saved up for a rainy day? According to a poll commissioned by CIBC, 45% of Canadians have no money set aside for emergencies. That could mean big problems in the event of a car breakdown, leaky roof, job loss, or serious illness. It’s important to have money saved up to cover these kinds of expenses, because you certainly don’t want to be forced to cover them your RRSP savings, a costly credit card, or a loan.

The general recommendation is to have the equivalent of three to six months’ worth of your income set aside. Business owners and those who work on contract are advised to aim for the higher end of that figure. The target may seem high, but remember, this is a goal you’re saving towards and hopefully something that you won’t need immediately. Start with small amounts and watch your savings—and security—grow.

Figure out a realistic amount of money that you can put aside every payday. Even just $10 or $20 week adds up over time. To make the process even easier, talk to your bank about setting up an automatic deposit—if your pay is deposted directly, the bank can move a predetermined amount from each pay into a savings account—ideally one with no or low rates and fees and which will accumulate interest. It’s helpful to treat these contributions as a recurring bill and to make depositing the money a priority.

To avoid the temptation to spend the fund on non-emergencies, you’ll want to keep this money separate from your day-to-day accounts. This is a great reason to open a TFSA if you don’t already have one.

In addition to contributions from your paycheque, there are a number of ways to steadily grow your emergency fund. Try to add a portion of the money you get from tax refunds, gifts, or salary raises and bonuses. Empty the loose change from your wallet and collect it somewhere to deposit in your account later. When you eliminate a budget expense—such as cutting out Double Doubles or cable TV—consider adding the amount that you’re saving into your emergency fund instead. It’s all about building good habits, and in a time of need, your future self and family will thank you.

Photo: iStock/BrianAJackson.