If you lost your job today, how long could you live on your savings? One month? Two? How long before you started the downward spiral of trying to live on credit alone? That’s the situation many Canadians find themselves in, living from paycheque to paycheque. It doesn’t have to be that way for you if you establish your emergency savings (also known as a contingency fund).
A contingency fund is an easily accessible pot of money that you can use in the event of an emergency. This could be a situation such as job loss or illness that affects your income. It could also be a one-time circumstance, such as the need to replace your furnace in the middle of winter.
At one time financial experts recommended that you have three months worth of living expenses set aside. This is a minimum. These days it is suggested you have six months worth of expenses saved. The amount you need to save depends on your personal situation.
Evaluate your budget
If you don’t think you have the extra money to put into savings, take a hard look at your budget and the money you spend on a daily basis. Are there areas you could cut back on for a while until you build your emergency savings? Check out the savings category of our blog for tips on cutting down your spending.
Don’t have a budget? Then make one right now. While you are documenting your living expenses, take specific note of the items that are essential, such as housing payment, utilities, insurance and food. These are the expenses you will have to continue to pay even if you lose your income.
Set a target
Set a goal for your savings. Once you reach that goal, you can redirect your savings to another goal – retirement savings, debt reduction or whatever you need or want to save for.
Set up a savings account
Find a savings option that gives you the highest possible interest while still allowing quick and easy access to your money in an emergency.
Begin contributing regularly
Treat the amount you're saving like a bill you pay each month. Arrange for that amount to be transferred directly into your savings account.
Don’t touch your emergency money
Your contingency money is there for emergencies. The rest of the time, pretend it’s not there. Don’t tap into it to pay for a new television or a trip to Vegas. However, if your furnace breaks down in the middle of winter, that might be a good reason to dip into the funds, with the understanding that you should replace the money as soon as possible.