If your furnace broke down tomorrow, do you have the money to fix it? What about if you were laid off from work, do you have money set aside to cover daily expenses until you got back up on your feet? Or what If you got hurt while playing a sport causing you to be off work for six weeks, would you be able to cover your mortgage payments, bills, groceries, etc.?
Life sometimes throws us a curveball, threatening our financial well-being and causing us stress. An emergency savings fund helps us be prepared for those unexpected life events.
What is an emergency savings fund?
An emergency savings fund is money you’ve set aside for life’s unexpected events such as the loss of a job, a debilitating illness or injury, or a major repair to your home. It provides you with a financial safety net and gives you comfort knowing that you can tackle any of life’s unexpected events without adding money worries to your list.
What if I don’t have an emergency savings fund?
Without an emergency savings fund, you’re living on the ‘financial’ edge, hoping to get by without running into a crisis. If an emergency does happen, it can cause a little problem to turn into a big, expensive financial situation. It can also cause a lot of additional stress.
As well, without an emergency savings fund, many people turn to debt instruments such as credit cards and lines of credits, to help cover costs. Depending on your financial situation, this could cause even more money worries as it’s only a short-term solution.
How much money should I save for an emergency?
When looking at the amount you need to save for an emergency, a good rule of thumb is three to six months’ worth of expenses. Calculate this amount using a budgeting tool. Over a few months, track the amount you've spent on your needs including housing, utilities, food, insurance, transportation, debt and personal expenses. Once you’ve completed this, you should have a good idea of the amount you should set aside for emergency purposes.
How can I save for an emergency?
Making regular payments into a savings account each payday is the simplest and most effective way to save money. It may not seem like a lot to begin with, but don’t let that discourage you. Over time, if managed properly, the fund will grow to the required amount.
When should I use my emergency savings?
When determining whether to use your emergency fund, ask yourself the following three questions:
1. Is it unexpected?
An unexpected emergency is one that you didn’t anticipate occurring, such as:
- Loss of a job;
- A debilitating illness or injury; or
- Major repair to your home or vehicle caused by circumstances out of your control.
Annual reoccurring expenses, such as property taxes, would not qualify as an unexpected emergency.
2. Is it necessary?
Needs are often confused with wants and you’ll need to determine if the unexpected emergency is a want or a need. For example, if you have a water leak in your kitchen and you have to put in new flooring, this could be considered a need or an emergency. On the other hand, if your flooring is old, and you want an updated look, this would be considered a want and you’re emergency savings should not be used.
New items are great; however, your emergency funds should not be used for them.
3. Is it urgent?
When an immediate need arises, the last thing you want to worry about is how you’re going to pay for it. When making a decision on whether the expense is an urgent need, determine if it will affect your ability to provide the basics for you and your family.
Remember, the money you have set aside should only be used if you have an unexpected, immediate expense. If you do use money from your emergency savings, be sure to replenish the money as soon as you get back on your feet by making regular payments.
Life may throw you curveballs, but being prepared will give you peace-of-mind knowing you have money set aside for those unexpected events. It will also help your overall financial well-being and reduce stress.
Are you prepared for an emergency? We’d love to help you get started – contact us today!