If the last year has taught us anything, it’s that emergency funds are critical. Not only should we be prepared for unexpected expenses such as malfunctioning appliances, car repairs and medical conditions, but we also need to be prepared for possible job losses. Even those who are self-employed should prepare themselves for falling market conditions and disasters that might affect their business.
Many people rely on credit for emergencies but doing so can be detrimental to your future and quickly rack up your debt levels. Having an emergency fund – a pot of cash set aside – is a much better choice as it ensures you have the money readily available for incidents and won’t have to rely on credit to pay for these incidents. Using credit to bail yourself out of emergencies will simply leave you swimming in debt, swamped with bills, and struggling to recover.
No matter how much money you make, or how well things are going at the moment, you never know when an emergency might arise that could leave you and your family struggling to pay bills, purchase necessities, or keep a roof over your head. Maintaining an emergency fund reduces the chances that you will have financial difficulty if such a disaster should happen.
How Much Money Should I Put Aside?
While experts used to say that a savings of at least three to six months of your income was sufficient for an emergency fund, these days many experts are recommending an even larger fund. It is now recommended that you put aside nine to 12 months’ worth of income for an emergency fund. If you have more than one substantial income in your household and feel confident that you would be able to cut back on expenses in case of an emergency, then less savings may be acceptable. However, in most cases, it’s better to be safe than sorry.
How to Save for an Emergency Fund
If you are just starting to build your emergency fund or have tried to put emergency funds away in the past without success, follow these tips on how to save for an emergency fund:
- Set up an entirely separate bank account that is to be used only for emergencies. This account should be easily accessible. Money that is tied up in retirement funds or stocks can be difficult to access in the event of an emergency.
- Don’t underestimate your expenses when asking yourself how much money you need. While it’s true that anything is better than nothing, it’s also true that the more prepared you are, the better.
- Contribute a set amount each time you get paid. Most employers offer direct deposits that can be separated into more than one account. This option seems to be the most successful in helping people save, since the money is placed into your savings automatically.
- Put any tax returns or bonuses from your employer directly into your emergency fund. Chances are, if you’ve been getting along just fine without the additional funds, you don’t need them now.
- If you’re having difficulty justifying the funding of your emergency account, cut back on other unnecessary expenses in order to acquire the extra cash needed.
Building a generous emergency fund is crucial if you want to ensure that you don’t go into major debt in the event of an emergency. If you’re already in debt due to an emergency and need help getting out of it, contact our certified credit counsellors. We can help you pay off your debt and get back on your feet. Book a free consultation today.