The unexpected happens—sometimes all too often! And these “little emergencies” aren’t always so little, often having a big impact that can really take a toll on our financial well-being. But having an emergency fund is like having a financial safety net that won't let you fall into debt and despair, so we're giving you a how-to guide on setting one up.
Unexpected Expenses Can Really Add Up
When we think about unexpected expenses, the usual culprits tend to come up—auto or home repair, vet bills, dental emergencies, and layoffs. So, consider this:
The average car repair costs around $500-$700.
Emergency veterinarian visits can cost thousands. (One woman in Brampton, Ontario was quoted $7,000-$10,000 for her dog’s treatment plan. Ouch!)
Dental and other medical emergencies not covered by government-funded healthcare can get pricey; a root canal can cost upwards of $800 while a dental implant can cost more than $3,000.
The average Canadian spends over 20 weeks between jobs with no income.
Canadians Are Saving—But Not Enough
The good news is the majority of Canadians (68%) have an emergency fund; however, less than half of those with a fund have enough to cover the full cost of their unexpected emergencies. In an online survey of 1,000 Canadians, about 50% had less than $10,000 set aside, and about 17% of those people had less than $1,000 saved up. When asked what their backup plan would be when they didn’t have enough to cover expenses, the following results were reported:
41% would ask a relative or friend for help, or sell a vehicle or other asset
25% would take out a line of credit
18% would dip into their investments
While it's great to see Canadians aren't completely relying on credit cards to cover the full cost of unexpected emergencies (because the interest on credit cards will drive you further into debt), these other fallback solutions aren't ideal. You don't want to be constantly pulling money away from your other financial goals and savings, or relying on a line of credit, which you will eventually have to pay back with interest.
What is an Emergency Fund and What Are the Minimums?
First, it’s important to know the difference between an emergency fund and a savings account. When we talk about an emergency fund, we’re talking quite literally! An emergency can be a roof leak or a plumbing issue, an emergency treatment for your pet, or a layoff. But it's important to note that some "emergencies" aren't technically emergencies. For example, some people might think that a car repair or oil change or getting new tires is an emergency, but the truth these aren't unexpected costs—you know they're coming, so you should budgeting for them throughout year and including them in your monthly budget.
Next, it’s important to determine how much money you should have in your emergency fund. Experts recommend you should be saving at least three months' worth of your salary if you have no dependents, and at least six months' salary if you're supporting others. So, if you’re only accounting for yourself and earn about $40,000 a year, your goal is to save at least $10,000 in an emergency fund. Have dependents? Double that to $20,000. If you’re thinking, easier said than done, here are four ways to get your emergency fund started.
4 Steps to Starting an Emergency Fund
For the full gist on setting up an emergency fund, you can check out How to Set Up an Emergency Fund. But in a nutshell, here are four steps you can take right now:
1. Start Saving Small
You can’t pull six months' salary out of thin air, so start by setting aside small amounts, like the $10 you saved by packing your own lunch for work or the $20 you save monthly by switching to a cheaper cell phone plan. Every little bit counts, so start small and keep it going.
2. Find High-Yield, Accessible Saving Tools
The survey referenced earlier asked respondents to indicate where they stash away their emergency funds. While a Tax-free Savings Account (TFSA) and Guaranteed Investment Certificate (GIC) were popular options, too many respondents also chose to keep some of their funds in savings accounts (47%), chequing accounts (34%), or keep it on hand as cash (16%). Those three methods result in very little to no returns in terms of interest, so they aren’t ideal places to keep an emergency fund. You might as well make your money work for you and go with a TFSA or GIC which yield higher interest.
3. Start Eliminating Debt
Every bit of interest you pay on debt is money that could be going towards your emergency fund. The best thing you can do is to try to consolidate your debt so you can begin to pay it down. Check out 7 Ways to Consolidate Debt Despite Bad Credit.
4. Create a Budget and Follow It
You need to know what you have coming in and going out each month, and it’s nearly impossible unless you sit down and figure it out, and then commit to making cuts where necessary. Sounds complicated? You’re in luck! We’ve created a personal budget planner for you that you can download now.
If you’re deep in debt and finding it too difficult to start an emergency fund, we’re here for you. Credit Canada’s certified credit counsellors can review your financial situation and make recommendations that may be able to get you back on track. Or, perhaps debt consolidation is right for you. No matter the outcome, we’re here to help. Just call 1.800.267.2272 to book a free counselling session—it’s free and confidential.