We’ve all heard about the importance of setting aside savings, whether it’s for retirement, buying a home, or a child’s education. But what about an emergency fund? Unless you’ve got psychic abilities, there’s just no telling what life surprises lie around the corner, so it’s important to put aside some “911 cash” in case an unexpected event occurs. Read on to learn 10 essential steps to saving money in an emergency fund.
Emergency Fund and Why You Need One
An emergency fund is money that you set aside for unexpected financial difficulties, such as a car or home repair, job loss, or accident/illness that may temporarily prevent you from earning an income.
Establishing an emergency fund will keep you from racking up debt due to an unplanned expense or interruption to your income. Furthermore, because lenders usually consider those in financial straits to be a bad risk, the only borrowing options available may be very costly high-interest loans or credit card debt.
How Much Should You Set Aside?
Most experts suggest saving three to six months of expenses to cover the amount of time you might be unemployed after a job loss. However, a good target to start with is the deductible on your home insurance or auto insurance. That way, you won’t be out of pocket if you make a property claim.
Tips to Build Your Emergency Savings Fund
Here are some simple strategies you can use to save up a nice cushion of cash that will soften the blow of any emergency.
1. Start small
It can be overwhelming to approach a savings target of three to six months of expenses, especially if you haven’t yet started your emergency fund. But, like any goal, it becomes much easier if you break it down into smaller attainable objectives. So, even if you can only save a minimal amount each month to start, that’s okay. The important thing is to begin setting aside money in an emergency fund, and eventually incorporate as many of the methods listed below to accelerate your savings.
2. Open a separate savings account
Research shows that setting money aside in a separate savings account creates a psychological barrier to spending it. Moreover, if you leave your savings in a chequing account and constantly see the available balance in it, you might feel tempted to splurge. Better to keep your emergency savings out of sight and out of mind.
Since you’ll need access to your funds at a moment’s notice when calamity strikes, you’d be wise to park your money in a low (or no!) fee high-interest savings account, such as the Savings Plus Account by EQ Bank, rather than invest it. Not only does it offer no monthly fees and free transactions (including Interac e-Transfers®), but also an everyday interest rate is 1.70%*. This way, you will still earn some interest income on your savings but can withdraw the money without penalty when you need it.
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
3. Automate your savings
As you’ve likely heard before, the secret to saving is paying yourself first. This means setting up automatic monthly transfers from your chequing account to your emergency fund, as you would with a recurring bill payment. Select dates immediately after you are paid for the transfers to occur so that your emergency fund savings become a top-line expense.
4. Switch to a cash back credit card
If you are not already using a cash back credit card, you are missing out on easy savings. For example, the Tangerine World Mastercard® provides 2% unlimited cash back on purchases in up to three categories (such as groceries, bill payments, gas or entertainment), and there is even a convenient option to automatically redirect your cash back rewards into your Tangerine Savings account.
5. Use an app to boost your cash back rewards
Link your credit or debit card to a personal finance app such as Ampli — a cash back app that gives you money every time you make a purchase at a participating retailer. How it works: download Ampli, link up your credit and debit cards, and then make purchases at eligible retailers. You automatically get money back whenever you spend money online or in-store at one of Ampli’s partners. The app tracks what you’ve earned and adds your cash back to your Ampli account. Promo: Use code AMPLI5 and get a $5 welcome bonus when you join Ampli.
6. Transfer a portion of lump-sum deposits
Whether in the form of a seasonal bonus, overtime income, tax refund, monetary gift, or any other sudden influx of cash, make a it a policy to transfer at least half of these deposits to your emergency fund. You likely won’t feel deprived because this is “found” money outside of your regular monthly budget, and you’ll still have the other 50% to play with.
7. Use savings tools
To help you follow through on self-imposed “policies” as described above, some banks offer a variety of handy savings tools. For example, Tangerine has “recipes” for saving including:
- Stash – any surplus balance over $1,000 is automatically transferred to savings
- Round-Up – purchases are rounded up to the nearest $1, $2 or $5 and transferred to savings)
- Pay Yourself First – a set percentage of each pay cheque is automatically transferred to savings
- Tax My Habits – a set percentage of spending in a given category, such as fast food, is transferred to savings
With these tools in your back pocket, you’ll become a savvy saver in no time.
8. Cut expenses (and transfer the difference)
It’s all well and good to buy on sale and shop around for a better deal on services, but unless you make a point to transfer any amounts you save to your emergency fund, chances are you’ll just end up spending those discounts on something else.
Last Word: Don’t Withdraw Money From Your Emergency Fund
Your best bet to building a hefty emergency fund is to treat it as sacred money and avoid withdrawing from it. Now, obviously, if you encounter a true emergency you can disregard this point. But, it may not be a bad idea to decide ahead of time what constitutes an emergency for you and write it down, so you can consult your list when your winter-weary self tries to argue that a heavily discounted vacation to sunny climes is an emergency. Replace any legitimate withdrawals from your emergency fund as soon as you’re able.
Don’t let the daunting goal amount of your emergency fund keep you from getting started. Every journey begins with a single step, so open your emergency fund today!
If you enjoyed this article, you may also enjoy: The Best Cash Back Credit Cards in Canada