If the current COVID-19 situation has taught us anything, it is that we need to be better prepared for unforeseen situations. Having an emergency fund is one of the most important things you can do financially. You don’t want to wait until you have an emergency to start thinking of implementing this into your plan. Just like you shouldn’t put off starting to save for retirement until your 50’s or 60’s. A plan is key here.
An emergency fund should be able to cover your major expenses for three to six months, or longer. These savings are basically a pool of liquid money set aside for unforeseen expenses, like a sudden job loss, major house repair, or things of that nature. You don’t dip into your emergency savings for your vacation, that designer item you’ve had your eye on, or expected expenses like buying Christmas gifts (you should plan to save for these short-term goals separately).
The recent pandemic is a perfect example of planning for an emergency. Many people lost their jobs and income without notice or went from a two-income household to one. Those that had a hearty slush fund didn’t lose sleep wondering how they would pay their bills. They weren’t counting on whatever the government decided to put in place to help. They had the comfort in knowing they had enough set aside for this very situation. They patted themselves on the back and breathed a sigh of relief knowing they would get through at least the next 3-6 months without risking their homes or other assets.
Those that didn’t, had to rely on the government support, and many still had to go into debt to get through these times. Those that lost their jobs and didn’t have enough available credit, couldn’t get approved for more since they didn’t have an income. This can set your financial plans back years.
So how much should you save? 3-6 months of expenses seems like a lot, and it usually is. In order to know how much this is, you need to have a good handle on your monthly cash flow to begin with. The important thing is to start saving now. Set up a regular transfer from your everyday chequing account to a separate high interest savings account. Match it up to your pay periods so that as soon as your paycheque goes in, your designated savings amount goes out. Keep in mind that you can adjust your number to simply bare-bones expenses at first. Once you reach that goal, you can add to it over time ensuring a future emergency doesn’t have to impact your lifestyle, and more importantly gives you peace of mind that your financial plans won’t be devastated.