The Importance of Building Emergency Savings. Start today
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By Elliot Lukacik, Bromwich+Smith staff | Reading time: 7 minutes | 1422 words | Date: 2023/09/08
Financial storms can hit when least expected. Whether it's a sudden medical expense, a job loss, or an unforeseen car repair, having a safety net in the form of an emergency savings fund is not just wise; it's a necessity. There are many questions surrounding how to use these savings including: How much should you save? What expenses should you save for? What can I spend my emergency savings on?
Getting Started
Starting an emergency savings fund might seem daunting, especially when there are other financial goals in your sight. However, you need to consider the setbacks you could encounter if you do not have any emergency savings. Think about this account as a safety net that prevents you from falling into debt during tough times or when an unexpected bill comes up.
Start by setting a realistic goal for your emergency savings. Experts often recommend having three to six months' worth of living expenses saved up. This cushion should cover essentials like rent or mortgage payments, groceries, utilities, insurance, and any other recurring costs if you were unable to work for any reason. You will not be able to set this amount aside overnight, it will take time to create this cushion. Start now by reviewing your budget. What do you have available each month to go towards savings? The goal is to set up you for a secure future, not to hinder you now or make it that you are unable to pay your current expenses. Even being able to set aside a small amount each pay period is a great start.
Why Should I have an Emergency Savings?
The only thing certain in life, is that nothing is certain and financial stability is not immune to this fact. Unexpected events such as medical emergencies, sudden job loss, or a major home repair can throw even the most careful financial plans off balance. Over 50% of all Canadian families have recently reported that a sudden expense of $200 or more will put them in a situation where they are unable to pay their bills. It wouldn’t take a large emergency to throw a wrench in current budgets at this rate. If you are in a similar situation, think about what types of emergencies could come up for you and start by working towards saving enough for that. Perhaps your hot water tank is on its last legs or your car has started making funny noises. If you do not have money set aside the odds are you will be putting these expenses onto credit cards which ultimately cost more.
What to Save For
Your emergency savings is not meant to fund vacations, concert tickets or shopping sprees. It's designed to protect your financial well-being in times of crisis. Here are some expenses to consider when building your emergency savings:
Medical Emergencies: Health should be a priority and medical emergencies can come with substantial bills. Your emergency savings should be able to cover unexpected medical expenses not fully covered by insurance. Many; but not all medical expenses are covered under provincial health care so it is important to understand what you are covered for. If you plan to travel outside of Canada, and have an injury you will need to pay out of pocket and wait for insurance to pay back.
Job Loss: In an unpredictable job market, losing your primary source of income can be a reality. Your emergency fund can help you stay afloat until you secure a new job. Seasonal work may be more difficult to come by, or you may find yourself unable to work and needing to go on leave if you have a medical situation, car accident, or loss of a loved one.
Home and Car Repairs: A leaking roof or a broken-down car can disrupt your daily life and drain your wallet. Having the money set aside for such repairs prevents you from relying on high-interest loans or credit cards which will end up costing more in the long run.
Unexpected Travel: Family emergencies or urgent travel needs can arise. Your emergency savings can cover last-minute trips without a major financial setback.
Essential Bills: From mortgage payments to utility bills, your emergency savings can ensure that you don't fall behind on crucial payments during tough times. If you are finding yourself needing to pull from savings consistently, you should consider looking at your budget. If you are not generating enough income to cover these monthly expenses, you may need to consider ways to increase your income or decrease spending. You may need to look into speaking to a Debt Relief Specialist and weight your options when it comes to your current debt load.
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Where to Avoid Using Your Savings:
While your emergency savings is there to provide security during unexpected crises, it's important to think through the purchase before you use up your savings. Here are a few things you should avoid using your emergency savings for:
Long-Term Goals: Your emergency fund is not your retirement or education savings. Dipping into it for such purposes can compromise your financial future. While these are also important savings to have, we recommend setting up separate accounts for each.
Luxury Expenses: Tempting as it might be, avoid using your emergency savings for non-essential purchases like vacations, retail purchases, concert tickets etc.
Debt Repayment: While it's crucial to stay on top of your debts, your emergency fund should primarily be reserved for true emergencies. Create a budget to manage your debt, and reach out for help to understand all of your options.
Investments: Emergency savings should be easily accessible. Avoid tying it up in investments that may be subject to market fluctuations and withdrawal restrictions.
Building and Maintaining Your Emergency Savings: Tips for Success
Automate Savings: Set up automatic transfers from your main account to your emergency fund. Treating it as a non-negotiable expense, or monthly bill payment ensures you pay into it and grow it every month.
Prioritize Consistency: Its ok to start small, because even a small consistent contribution will add up over time. Its important to start somewhere.
Replenish: When you do use your emergency savings, make it a priority to replenish the fund as soon as your able to do so.
Review and Adjust: As with your monthly budget, make sure you take the time to review and see what is, or is not working for you. Adjust your goals and contributions as needed.
Starting an emergency savings fund can seem daunting, so take it step by step and remember, emergency savings is not just a financial bumper; it's protection against life’s unexpected situations. By starting early, setting realistic goals, and distinguishing between essential and non-essential expenses, you're laying the groundwork for a stable and secure financial future. Future you will thank you for the steps you are taking today.
If you are struggling with your monthly bills, and unable to pay off your monthly balances let alone find money for emergency savings remember that you are not alone. Bromwich+Smith has a number of debt relief strategies to help you regain control of your finances and get your life back on track. Reach out today for a free, confidential, no obligation consultation. Bromwich+Smith’s Debt Relief Specialists are available by phone at 1-855-884-9243, or request a call back at contact us page.
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FAQs:
1: How much should I save in my emergency savings fund?
Experts often recommend having three to six months' worth of living expenses saved up as a realistic goal for your emergency savings. This should cover essentials like rent, groceries, utilities, insurance, and other recurring costs in case you're unable to work.
2: What can I use my emergency savings for?
Your emergency savings should be used to cover genuine financial emergencies like medical expenses, job loss, home or car repairs, unexpected travel, and essential bills. It's not meant for luxury expenses, debt repayment, investments, or long-term goals.
3: Why should I have an emergency savings fund?
Life is unpredictable, and unexpected events like medical emergencies, job loss, or major repairs can disrupt your finances. An emergency fund acts as a safety net to help you stay afloat during tough times and avoid relying on high-interest loans or credit cards.
4: What expenses should I consider when building my emergency savings?
When building your emergency savings, consider expenses like medical emergencies, job loss, home and car repairs, unexpected travel, and essential bills like mortgage and utilities. These are the financial areas that your emergency savings should safeguard.
5: How can I best manage and grow my emergency savings fund?
To manage and grow your emergency savings, automate transfers, prioritize consistency with regular contributions, replenish the fund when used, and regularly review and adjust your savings goals and contributions based on your financial situation.
Author:
Elliot Lukacik, Vice President of Strategic Growth and Business Development at Bromwich+Smith
Elliot is responsible for the creation and execution of the Sales, Business Development and Partnership Growth Strategy for Bromwich+Smith.