In this article, we discuss how to build an emergency fund. For people who are trying to dig their way out of debt. Setting aside $500 to $1,500 (depending on their situation) to cope with emergencies, enables people to focus on paying down their debt, and often removes the need to use credit when emergencies occur. It is a powerful tool that helps people stay on track and get out of debt.
Relying on credit as your only emergency fund is short-sighted, as you will not only have to cope with the emergency, but you will then have the added burden of debt and interest charges.
Basically, an emergency fund is your shield against having to use credit as a source of income.
What is an Emergency Fund?
Let’s start with what it is not – it is not a great sale on shoes, it is not a vacation, it is not the latest electronic toy, it is not a hot tip on a horse/stock, and it is not any purchase that can be reasonably put off.
An emergency fund should cover three to six months of your expenses. The more unstable your income, the more you should have in your emergency fund. An emergency is an essential and unexpected expense that you cannot put off – for example – fixing the car that takes you to work, repairing the leaking roof, and visiting the dentist with a toothache.
As your financial situation improves, and as you develop skills in budgeting, there are many things that you will be able to plan and save for – that will help to reduce the number of emergencies you have to face – ie:
- Car Maintenance
- Home Maintenance
- Dental Check-Ups
What happens if I need to use the money?
If money from the emergency fund is used, it must be replaced asap.
If you are in the process of getting out of debt, you may have to rebuild your emergency fund by making minimum payments on your debts and putting the rest towards your fund.
If you are out of debt and have to use your emergency fund, then you will need to refund it as soon as possible by putting non-essential spending on hold.
How to avoid spending the money in your emergency fund
To help keep your emergency fund available in case of emergencies, but safe from unnecessary use, it may be wise to:
- Keep your emergency fund in a separate bank account
- Do not have debit card access to your emergency fund
- Get the best interest you can without risk or tying up the fund for a period of time.
Some people like to keep a small portion of their emergency fund in cash, at home, and in a safe hiding place. There are good and bad points to this approach, and you must carefully consider what is best for you and your family.
Where do I find the extra money?
Properly funding your emergency fund requires consistency and follow-through. Depending on your situation, you may need to:
- Sell some of that useless stuff that is laying around your home.
- Cut back on your ‘entertainment’ expenses. Forego things like meals out, going to the movies, buying lunches, vacations, etc.
- See if you can get a temporary, second job to build up your fund.
- Cut down on your non-essential expenses.
- Track your success in building up your emergency fund – make it a priority.
Eliminate your debt so you can start building an Emergency Fund
If you are unable to save enough to contribute to your emergency fund because you’re overwhelmed with high interest debt or lines of credit then it might be time to explore options to eliminate that debt.
Believe it or not, you can get out of debt in Ontario without declaring personal bankruptcy or resorting to costly debt consolidation loans. The government of Canada offers a little-known debt-relief program, called a consumer proposal. A consumer proposal can reduce your debt by up to 80% through a negotiated settlement with your creditors without interest or penalties.
Only Licensed Insolvency Trustees (LIT) like us are federally regulated by the government to guide you through the process. We sincerely care about helping you.