Your Emergency Fund: Are you financially prepared for the unexpected?
The emergency fund is often overlooked but it can be the difference between comfort and crisis for your family. Consider this situation: Let’s say that you own a business and a key supplier dramatically raises their fees. In order to keep your business operating smoothly, you may have to direct funds away from your salary to maintain the business at its current level. As you start to pull away dollars from your salary, you may find yourself less and less able to cover mortgage costs. The question then becomes do you disrupt your business operations or do you cover your mortgage. For many entrepreneurs, this can be a challenging toss up.
Luckily, if you had saved an emergency fund over the years, this issue might never arise. When you have to cover unforeseen expenses, your emergency fund is there to cover your back.
According to this report from Manulife, roughly 1 in 5 people in Canada have less than $5,000 in savings set aside for emergencies. This is an alarming figure for many reasons. Emergency funds are crucial aspects of true financial stability. No one can predict the future, but you can do your best to prepare for the worst-case scenarios. Emergency funds protect you from terrible consequences that can happen with unexpected life situations.
If you get injured skiing at Cypress, become sick with a serious illness or have to do major home repairs, your emergency fund is there to ensure that you and your family are kept safe.
Here are some details that will help you grow an emergency fund of your own.
Start tracking your income and expenses
I’ve touched on this in past blogs, but it can’t be stressed enough how important making a personal budget is. Break out the spreadsheet and start plotting things. For Canadian readers, you can try using some of the apps in our Best Apps to Track your Finances article.
Tracking your finances is one of the most important things you can do for yourself. Not only will it allow you to track the growth of your net worth over time, but also it will allow you make financial decisions that ensure your safety in the future.
Set a savings goal and start working towards it
Once you have a spreadsheet set up, set a goal for savings. An emergency savings target of $5,000 is a good goal to initially strive towards. Determine what kind of timeline you’d like to set to achieve that goal and work backward.
Once you know how long you want to take to achieve your desired emergency savings goal, what amount you want to have in it, you can figure out what amount you need to save every month.
Start funneling away money from your income each month towards your savings goal and make it a routine.
You can automate some of your savings through your online banking or you can have apps do it for you if you feel that technology is the best way for you to save.
Keep your emergency fund easily accessible
There is no use in an emergency fund that can’t be used immediately in the case of an emergency. A low-interest savings account, which will give you some minor gains over time but will not incur penalties if you need to withdraw, could be a great option for an emergency savings fund.
Liquidity is ultimately the most important feature of an emergency fund. Make sure your money is safe, secure and can be used whenever it needs to be used.
Start saving for an emergency fund, finish saving for retirement
Life is all about setting goals. Once you complete saving for your emergency fund, don’t stop there. Building a habit of saving is extremely valuable and you shouldn’t just let it go.
Once you have a solid emergency fund in place, keep your momentum up and start setting goals for retirement savings. Build off of your earlier spreadsheet and push towards a goal. Achieving goals is addictive and once you start seeing the impact that financial goal setting can have on your bottom line it will become much easier to save for your future.
Live your life in the moment, but don’t forget to make sure that the moment lasts as long as possible.
Thanks for reading!
If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.
- Brad Blair, CFP, CIM, FCSI, CHS.