Some of us are brave (foolish) enough to confidently state that we don’t need an emergency fund. Bad things will never happen to us. Nothing major has come up yet, so why should we expect that it suddenly will?
Puh-lease! Unexpected events happen all the time. An ACL tear during a soccer game could put you out for a year - bad for anyone, but especially if you’re a physical labourer. Or how about a phone bill with big roaming charges you didn’t expect when you come home from a trip? And what about a leaky roof or a flood in the basement.
It’s situations like these, where an emergency fund acts as a parachute, and prevents you from hardship. And, mind you, helps to greatly reduce your cortisol levels.
The general rule of thumb is to hold anywhere between three to six months’ worth of expenses. To be clear, this means essential expenses. Netflix is not an essential expense!
Here are 5 tips to help you build an emergency fund.
SAVE, Don’t Spend Your Tax Refund
According to a 2015 report from the Canada Revenue Agency, nearly 58 percent of individual taxpayers received refunds after filing their tax returns. The average tax refund was $1,645.
Now, you could indulge and blow the refund as soon as it comes in, but putting it into a high interest savings account could give you a massive head-start on building your emergency fund. Granted, it’s very hard to find a high interest savings account and all five big banks are giving back a goose egg, but if you look hard enough, there are some worthwhile options out there.
Sell the Stuff You Don’t Need
Kijiji is a huge market in major cities. Look around your house and you will be amazed at how many items you could sell. Old text books, shoes, event tickets, transit passes, gift-cards – there are a ton of opportunities.
Depending on how much of a minimalist you are, the possibilities are endless. Even the more attached folks can find something to liquidate.
Get a Side Hustle
Yes, we all want to spend more time with our family. The idea of getting a second job (yes, that’s what a side hustle is) is not very enticing. However, when “life” happens, you will be glad you worked those extra hours on the weekends.
Working a few hours every now and again can make a huge difference when unexpected events happen. It is refreshing to know that you have extra cash in hand for your rainy day.
Find Ways to Cut Back
Cutting back on expenses can make a world of difference, but it is not always easy. Be honest with yourself and take a look at your budget.
Do you have a gym membership, but go only once a month? Cancel the membership. The weather is getting better; you can workout in your neighbourhood park for free.
How about cable? Everything is online and there are a lot of streaming services that yield savings.
If you’re burning through a ton of gas by sitting in traffic on your daily commute, maybe taking transit would help you save. It could even help you pay less on insurance.
Make Your Savings Automatic
To start your emergency fund, set up an automatic transfer from your chequing account to your high-interest savings account. It can be a small amount to start; say $25 on the 1st of every month. Once you get in the routine and stop missing the extra spending money, increase your contribution.
It can also be helpful to make the transfer occur the same days that you get paid. This way you won’t miss the money, or even notice it’s gone.
You may be wondering, “Should I create an emergency fund if I have debt?” and that’s a valid question. Though some might argue otherwise, it typically does not make sense. If you’re paying interest on your credit card at 19.99 percent, it’s better to just get out from under that obligation first. Once you’re settled up you can make larger contributions to the emergency fund to catch up.
Not everyone can amass cash reserves for 3-6 months’ worth of expenses, but even a small fund will be helpful for a rainy day. Your emergency fund will be your BFF during toughest of times. Be kind to it, and keep it fed with a little bit of cash.