The real way to build an emergency fund

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The real way to build an emergency fund

Everyone should have one! Prepare for the unexpected and have one less thing to worry about if something happens.

It’s an unsettling fact: most Canadians don’t have money put away for an unexpected event. According to a 2015 survey by Pollara, a strategic insights firm, 44% of Canadians have less than $5,000 set aside for unexpected expenses, and a quarter of working Canadians are living paycheque to paycheque with no emergency cash at all.

If that sounds like you, don’t stress out because building an emergency fund is not an impossible task – here’s how to do it.

How much? So, how much should you have in your emergency fund? Ideally, your fund should equal three to six months of your take-home salary but at the very least, you should save enough to cover your basic needs, like buying food and paying the household bills.

How to? An adequate emergency fund won’t happen overnight – build it steadily, progressively and as aggressively as your finances will allow by:

  • Determining how much you need in your emergency fund and how long it will take you to reach your goal based on a realistic monthly contribution.
  • Authorize automatic monthly payments from your chequing and/or paycheque account to your emergency fund account.
  • Trim unnecessary monthly bills by eating out less often, by setting up a carpool or using public transportation, or by reducing household costs and putting that money into your fund.
  • When you get a bonus or an unexpected tax refund, don’t blow it all on a vacation. Instead, put some into your emergency fund and perhaps into an RRSP, and, yes, set aside a few dollars for fun.

How not to? Even if you have a line of credit, you still need an emergency fund. Drawing on a line of credit increases your debt and whatever you buy with it will cost even more because of the interest you’ll pay. Plus, getting too comfortable with one kind of debt can snowball into other types – like credit card debt, which is extremely expensive. That’s why it’s always better to pay for emergencies with cash on hand.

And don’t be tempted to use that emergency fund for a vacation or another impulse purchase. It’s for true emergencies only!

How to make it grow? Turn your emergency fund into an investment in a money market mutual fund, redeemable guaranteed investment certificate (GIC), or government savings bond that will protect your capital, deliver a decent interest rate and let you withdraw your money quickly with little or no cost as needed.

Emergencies are a fact of life but you can cushion the effects when you’re financially prepared. Keep your financial life up and your stress level down by talking to your professional advisor.

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.