What exactly is an emergency fund? You’ve probably heard the word mentioned a couple of times, and it’s vital to have one. But what exactly is it?
Put it simply. An emergency fund is an emergency fund that you can access at any moment during the event of an emergency.
It’s impossible to plan for every eventuality that comes up. Even the most unlikely events can cause a financial burden if you do not have an emergency fund to draw upon. Think of life-changing events like the sudden loss of a job or illness that strikes unexpectedly or a furnace malfunction, and so on.
It’s probably not something you planned for, and having this jar of “safety net cash” is a fantastic way to reduce the risks of an emergency. It’s not just a way to give you some security financially while dealing with life events. However, having this “back-up” money will provide you with the peace of mind you need. See how anxiety levels decrease after you’ve created your emergency reserve.
How much should I keep in my emergency reserve?
It’s recommended to keep 3 to 6 months’ daily expenses saved in your savings. Let’s suppose you earn three thousand dollars per month after-tax. However, the total amount you spend per month is according to:
- Rent = $1000
- Food = $200
- Bills: $300
- Transportation: $300
- Miscellaneous: $200
This would translate your monthly expenses total to $2000. Divide that number by 3-6, and you’ll have an emergency fund amount of anything from $6000 to $12,000. This tool is excellent for assisting you in calculating the exact amount you need within your reserve fund for emergencies.
I make monthly contributions to my RRSP / 401K and am now contributing about 3-6 months of living expenses. Does this matter?
No. A fund for emergencies is not stored or secured inside an investment account to earn a profit. Your emergency fund must be a cash reserve that can be used if you require it. It shouldn’t depend on the ups and fluctuations of the market either. The idea here is to stay away from becoming “cash insufficient.” You may have thousands of dollars saved through ETFs and mutual funds as part of pension savings, but you won’t be able to gain access to that cash. It’s in no way easily accessible. The retirement funds you have are necessary for you in the building; however, it’s not an emergency savings account. The emergency funds can be kept in a high yield, high-interest savings account and a TFSA when you’re Canadian or your primary account, as you don’t use it.
I don’t get it. I thought I was supposed to invest all my money in the market?
Investing is paramount when enhancing money, yet consider your emergency fund not as an opportunity to increase your wealth but rather as an insurance policy to minimize the risks of any situation that could turn into an expensive financial commitment.
I’m a single mom who lives paycheck-to-paycheck each month, and I cannot put aside the funds to begin building an emergency fund.
An emergency fund could be considered a top priority for achieving financial independence. Even the case that it’s an amount that is small to begin each penny goes in a significant way. Here are some alternatives to think about:
- Bonus for work: If you’re lucky enough to get an annual pay increase from the company in a large amount and want to put it in your emergency fund, it is a fantastic way to ensure you have safety in the form of cash.
- Tax refunds If you’re hoping to receive an income tax refund this calendar year, is there a lot you could do with the money (including investing in debt, paying it off, and much more)? If you don’t posess an emergency savings account, you’re in luck! Transfer the money into an account for your emergency fund, and don’t play with it! If it doesn’t meet the requirements for three months of expenses first, put an initial sum of money. After that, you can set yourself up with a budget to pay into your emergency fund every month. It doesn’t matter if it’s $50 a month or $200 semi-monthly; any amount counts, and you shouldn’t be able to discredit your contribution.
- Increase your income: You may be paying your bills every month, but this doesn’t mean you need to be. There are many ways to increase your earnings through an extra job, eventually making your earnings more. In reality, there are various methods you can increase your profits to six figures.
- Cut costs: Evaluate how you’re spending your money currently. Are those $100 per month you allocate to your manicure a need? Reduce the cost of fringe services which can allow you to increase the amount you contribute to your account. Make your nails yourself or replace your regular facial using at-home masks, even for a brief duration. The emergency fund you have should be the top priority in your financial situation, and you should keep this in your mind when you think about your daily expenses.
- Offer something for sale: Got something around the house that you don’t utilize frequently? Do you need to clear out your closet? You’ll be amazed by how much cash you can earn by selling your items. Utilize websites like Kijiji, Poshmark, eBay, Amazon, or Facebook marketplace to begin selling your possessions in under five minutes! Remember that a woman’s garbage is another woman’s treasure! Woman’s treasure! You can take the money you earned from the sale and deposit it into your emergency account.
