According to one report, two out of five Canadians cannot afford a financial emergency. Does this sound like you? When your bank account feels stretched thin, it can be difficult to achieve any of your short-term or long-term goals. If you don’t have any type of emergency fund, it’s smart to create one as soon as possible.
What does this fund include and why is it so important? Today, we’re breaking it all down and sharing how you can start saving smarter, starting today.
What Is an Emergency Fund?
As its name implies, an emergency fund is an account that’s set up at your bank, designated specifically to help you pay for an unexpected event or disaster. From a leaky roof to a broken-down car, there are many issues that you could face in the future, and many of them are more expensive than you realize.
Some of the most common unplanned expenses include:
- Vehicle repairs
- Medical bills
- Home repairs
- Loss of income
Without a solid reserve of cash on hand, you could be required to borrow money to help cover those costs. Most of the time, an emergency savings fund is kept separate from your regular monthly expenses and spending.
Why Is It Necessary?
As long as you can cover your everyday costs, you might wonder why you need a reserve of money to cover emergency funding. The reality is that if you have no savings at all, then any financial shock could put you into debt, even if the expense is minor.
From there, the process is cyclical. If you struggle to recover from an unexpected expense, it becomes even more difficult to bounce back after a future emergency. In response, you may rely on various forms of debt to help you pay your bills, including:
- Credit cards
- Personal loans
- Loans from family or friends
The more your debt compounds, the more difficult it becomes to pay it off. You may eventually find that you have to pull from other types of savings, such as your retirement account, to lower your expenses.
How to Start One
When it comes to creating an emergency fund, getting started is often the hardest part! If you haven’t been in the habit of setting aside money on a regular basis, adding that step to your routine can feel challenging. Let’s take a look at a few ways to simplify the process.
1. Start With Realistic Goals
Eventually, your savings account should have enough money in it to cover three to six months of your living expenses. That way, if you find yourself without regular income or surprised with a major expense, you can still eat, pay your bills, and live in your home.
However, that can be a lofty goal to begin with! Instead of psyching yourself out and trying to build your savings up all at once, start small! Aim to accumulate around one month’s worth of expenses or even two weeks.
The more attainable your goals feel, the easier and more rewarding it will be to reach them. This will encourage you to stick with the plan, especially as you see the tangible progress you’re making.
2. Create (and Follow) a System
To increase your emergency fund, it’s best to have a solid, repeatable system that you can follow. Simply assuming that you’ll remember to add some of your paycheck savings to the account might work out the way you planned. Life gets busy and we get forgetful.
Instead, try to make the process as simple and automatic as you can. One of the easiest ways to do so is to set up automatic, recurring transfers each time you get paid. That way, a portion of the money you earn hits your account on a consistent basis, and you don’t even have to think about it.
If you’d rather handle the money yourself, you can cash a set portion of your paycheck each week or month and set it aside. Try to keep the amount the same, occasionally setting aside more if you can afford to do so.
3. Cut Small at First
As you start to focus more on saving, you might find that your desire to spend lessens. You’ll also notice areas in your life where you could afford to cut back a little.
For instance, could you make coffee at home instead of spending $5.00 a day on an expensive cafe latte? Are there any television, internet, or magazine subscriptions you no longer use? What about shopping or entertainment expenses you could curb?
The goal of saving isn’t to drastically limit yourself or lower your quality of life. However, it does require taking an honest look at your spending habits and thinking about how they’re affecting your financial security.
Not sure where to start cutting back? Here’s a list of six places to start.
4. Monitor Your Progress
It’s exciting to see your emergency savings account grow! As you get more thoughtful about your spending and you devote automatic payments to the account, you’ll notice real progress that you can feel good about.
Along the way, it’s a good idea to check the status of your account on a regular basis. This way, you can see how much you’re earning and think of ways to grow your savings even more.
5. Know When to Stop
Remember: Your emergency savings account is a portion of your earnings set aside so you can access it very quickly as needed.
As such, it’s likely stored in a low-yield account, such as a standard savings or money market account. Traditionally, these vehicles have very conservative, low interest rates. Once you’ve reached your savings goals, it’s smart to start saving excess money in an account with better rates that can make you even more money, such as a retirement portfolio.
Need Help With an Emergency Expense?
If you haven’t set up an emergency fund yet, don’t worry. Any time is a good time to get started! With these simple tips, you can start saving and stop stressing.
None of us is prepared for every surprise expense that might come our way. This is why it’s smart to have a financial safety net you can fall back on when the unexpected occurs.
Until you get there, we can help you cover those costs. At Kingcash, we can connect you to personal lending solutions, including same-day loans without a credit check. To learn more and get started, complete our online form!