Allow me to expand on last week’s blog calling for general financial preparedness and frugality as uncertain economic times roll out in Canada. I want to be very firm and specific about why able, wage-earning families and individuals need to create savings in the form of an emergency fund.
I’ll be blunt about the matter. If you have no savings plan to cover expenses for a rainy day, you are being dangerously short-sighted. There’s always a chance that fickle fate will deal you a bad hand in life. Suddenly, you’re desperately scrambling to stay in the game.
Think dental and eye care emergencies, or disabling conditions that may not be shielded as you miss work.
Unexpected financial shortfalls can hit you in a variety of ways. For instance, major car and household needs and repairs that may not be adequately covered. Or how about medical expenses associated with problems for which you are not protected beyond Canada’s publically funded health care system? Think dental and eye care emergencies. Imagine disabling conditions during which you may not be shielded financially as you miss work.
What about a job loss requiring an income safety net to pay for life’s necessities during what will likely be months of searching for new employment? Then there’s unplanned travel. Who knows when you will be called upon to visit distant family members or loved ones in dire or tragic circumstances? The list goes on.
The time-honoured rule for creating a budget that includes emergency savings is that you tuck away the equivalent of three to six months of your income.
I’ve said it before in this blog space and I’ll say it again: the time-honoured rule for creating a budget that includes emergency savings is that you tuck away the equivalent of three to six months of your income. Under no circumstances do you use money from this fund for anything but an emergency, which can be defined as any situation involving the following:
- Loved ones who are gravely ill or in dire need;
- Critical requirements in relation to housing, food, and health care; and
- Technology and tools essential to work to maintain an income (vehicles, computers, etc.).
Granted, achieving your goal will take some time. The main point is to set the mark and do your best to reach it.
Further to what is recommended for emergency savings, imagine that you have a relatively modest take-home pay of $3,500 a month. Using the minimum rule of thumb, you ought to set a goal of about $10,000 in savings (about three month’s income). Granted, achieving your goal will take some time. The main point is to set the mark and do your best to reach it.
This may require lifestyle changes requiring that you strictly adhere to frugal spending by putting needs over wants. You may have to track your spending over a month or two to determine spending habits and new ways to save. If you aren’t already doing so, you will certainly need to prepare a written monthly budget and stick to it.
Think about putting money away automatically through your bank, and use the best savings-investment tools available to avoid withdrawal penalties. Best talk to a good financial coach or your bank about the matter.
There is a handy emergency savings calculator that I discovered online through money-zine.com.
Whatever your income and expenses, there is a handy emergency savings calculator that I discovered online through money-zine.com. As the site says, and I quote: “The calculator takes the total of all essential living expenses, and uses this information to determine the size of a minimum and optimum emergency fund. From this value, the calculator subtracts any money already set aside for this purpose to determine the additional savings required to meet this need.”
To use the emergency funds calculator, click here.