Handle the Unexpected with an Emergency Fund
What do you do if you find yourself with some extra money at the end of the month? Will you immediately look for ways of spending it? Instead, you may want to consider putting it towards an emergency fund.
As we have all learned in the past year, life can be full of surprises- sometimes unpleasant ones. When the unexpected happens, for most people the biggest worries are financial ones. As we mentioned in an earlier article, nearly half of Canadians are $200 or less away from financial insolvency according to an Ipsos poll. Having an emergency fund to act as a buffer will make it easier to get through the tough times.
Ideally you want to have enough in your emergency fund to handle three to six months of expenses. For most of us that can seem like a tall order but don’t let that discourage you. Instead start by taking baby steps. For example, you can set yourself a target of having $500 or a $1,000 in your emergency fund- a target that is more achievable and will set you on the right path.
With an emergency fund in place, you will have the peace of mind knowing you don’t have to turn to credit cards or payday loans if you lose your job or have to deal with an unexpected expense, such as the ones listed below:
Being out of work
Finding yourself without work can have a huge impact on your finances as it may leave you without income for weeks or even for several months. Unfortunately, that doesn’t stop the bills from coming in. The average household expense in Canada is around $4,000 a month and somehow you need to take care of those expenses even if you are out of work.
A medical emergency
Even though in Canada we benefit from an excellent healthcare system that is mostly free, an illness or accident can still lead to unexpected expenses. In addition, if you need to take time off from work for recovery, this can further impact your finances.
Many Canadians live on a tight budget. If you are one of those Canadians, you know that any increases in rent, gas prices, or other key expenses can have a major impact on your budget and leave you with a shortfall.
As any car owner knows, repairs and maintenance costs can easily add up. Some unexpected expenses can be avoided by proactive and regular maintenance. But unexpected expenses can still come up and they can easily cost hundreds of dollars or even more for more serious repairs.
The same applies to home related repairs and expenses. While we can avoid certain expenses by regular routine maintenance, emergencies can still happen, often requiring a significant amount of money to deal with the problem.
Build Your Emergency Fund Now
Your emergency fund can act as an insurance to protect you from unpleasant consequences when the unexpected happens. Knowing you have this fund in place will give you peace of mind and the confidence to deal with what life throws at you. But it’s important to start now, if you haven’t already. The first step is often the hardest so even if you can only set aside a small amount do it now and commit to adding to it whatever you can each month. You may be surprised by how quickly your fund can grow if you stick to making regular contributions.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.