Don’t let an unexpected emergency clear out your household finances.
In the wake of the pandemic, many Canadians have realized the crucial importance of having a financial safety net for unforeseen circumstances.
A survey conducted by FP Canada revealed that nearly two out of five Canadian households (39%) do not have sufficient funds in their bank accounts to cover emergencies such as COVID-related job losses or business closures.
Furthermore, one in three Canadians (32%) admitted to rarely setting aside money for savings at the end of each month.
While most individuals recognize the necessity of saving for unexpected expenses, many struggle with knowing how to begin or determining the appropriate amount to save. This can be particularly daunting for those starting from scratch.
Fortunately, taking small steps is perfectly acceptable, provided that one begins somewhere. Here are some practical tips to initiate the savings process:
When considering emergency funds, it’s often clearer to define what they are not rather than what they are.
Expenses like your child’s prom, missing out on playoff tickets, or falling behind on holiday shopping do not constitute emergencies. True emergencies are unforeseen events that can lead to significant expenses or disrupt your ability to earn income.
Examples include unexpected car repairs, sudden job loss, or a flooded basement. For these situations, it’s essential to establish an emergency fund, separate from your regular accounts, as a safety net.
Life with pets can be unpredictable, but there are ways to safeguard against the unexpected.
Fetch Insurance provides comprehensive coverage for various pet needs, including treatment for accidents, illnesses, prescription drugs, and emergency care.
Moreover, their optional wellness plan extends coverage to routine vet visits, grooming, and training expenses, allowing you to give your pet top-notch care while protecting your finances.
When setting up your emergency fund, it’s crucial to strike a balance between accessibility and temptation.
Consider opening a high-interest savings account that offers competitive interest rates and convenient access for withdrawals or transfers in urgent situations.
To streamline savings, automate the process. If your employer provides direct deposit, allocate a portion of your earnings directly into the savings account. Alternatively, if you manually deposit paychecks, set up recurring transfers to the emergency fund.
While guaranteed investment certificates (GICs) may offer higher interest rates, they come with limitations. Early withdrawal penalties imposed by banks or credit unions can discourage tapping into your emergency savings when unnecessary. However, this also means sacrificing the flexibility of a high-interest savings account and potentially incurring financial penalties during emergencies. Consider the pros and cons carefully before making a decision.
To maximize savings, it’s essential to evaluate and minimize expenses. Review your bank and credit accounts to identify areas where spending can be reduced.
Consider cutting costs by eliminating or downgrading services like cable TV, as many entertainment options are now available through streaming platforms. Cancel unnecessary gym memberships and utilize free community center facilities for workouts. Reduce daily expenses by skipping expensive coffee purchases, carpooling to work, installing a programmable thermostat to save on energy costs, and cooking meals at home.
Additionally, explore opportunities to generate extra income. Offer lessons in skills such as art, music, swimming, or carpentry during your spare time. Sell unused furniture, electronics, or household items on online platforms like eBay or Craigslist to declutter and earn extra cash.
Utilize free smartphone apps to enhance your saving efforts.
Explore cashback apps that allow you to earn money back on purchases.
Engage with online services offering gift cards from a wide range of retailers in exchange for completing surveys and watching videos.
Take advantage of robo-advisor apps to conveniently monitor and manage your investments while on the move.
It’s recommended that every household maintains an emergency fund capable of covering expenses for at least three months. However, the ideal amount depends on various factors such as family size, outstanding mortgage debt, and the potential for job loss.
While some experts advise saving for six months’ worth of expenses, others, like personal finance expert Suze Orman, suggest aiming for emergency funds that can sustain you for up to three years, especially considering the unpredictability of events like the coronavirus crisis.
To determine your savings goal, calculate your monthly expenses, including rent or mortgage payments, car expenses, insurance, childcare, utilities, and groceries. Multiply this total by the number of months you want your emergency fund to cover.
For personalized guidance, consult with a banker, accountant, or credit counselor, who can review your financial situation and ensure you’re on the right path. Alternatively, utilize online emergency fund calculators for assistance.
The average annual household spending in Canada stands at $86,070, according to recent Statistics Canada research. Therefore, a six-month emergency fund for average earners should aim for approximately $43,035, while a three-month fund would amount to $21,518.
Though saving five-figure sums may seem daunting, remember that even modest monthly contributions are beneficial. Whether it’s $500, $200, or even $50 per month, consistency is key.
Jump-start your savings by researching banks that offer introductory bonuses for new customers. Additionally, resist the temptation to splurge when receiving unexpected windfalls, such as tax refunds. Instead, allocate these funds directly into your savings account.
By building a sufficient financial buffer, you can avoid accumulating debt for unforeseen expenses. Whether it’s covering the cost of a new transmission or navigating job loss, having an emergency fund in place safeguards against depleting retirement funds or selling stocks at a loss.
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