By Jillian Stinson
The world is uncertain, and no one is immune to unexpected expenses…hence the importance of building up an emergency fund.
Even if you manage your money carefully and are thrifty, you are not immune to the unexpected. It is therefore essential to build up an emergency fund.
Here are five tips for building an emergency fund that will give you some well-deserved peace of mind:
Create a budget
Watch your debts
Get down to business
Make wise investments
Consult an advisor
- Create a budget
When income increases, the first instinct is often to take advantage of it to spoil yourself. Now is the perfect time to reassess your budget.
The goal is not to over-tighten your belt. On the other hand, it is to your advantage to:
have the right time;
identify leaks;
know when you can afford minor deviations.
The important thing is to set realistic and achievable targets in the short term; you can then aim further.
Feel free to use our online budget calculator.
- Watch your debts
Think carefully before accepting the credit limit increase offered by your financial institution. Ideally, your limit should not exceed your net monthly salary.
Prioritize those with the highest interest rates when paying your credit card accounts. If you have more than one to pay off, a consolidation loan can help you manage your debts by combining them into one monthly payment.
- Get down to business
When your financial situation is in good shape, it’s time to start building your emergency fund.
Figure out how much you want to set aside and set yourself a reasonable goal. Experts recommend amassing the equivalent of about three months’ net pay. Your net salary is the amount that is deposited in your account (after taxes and other deductions). If you lose your job, your emergency fund will help pay the bills until you get back on track.
An easy way to do this is to set up a direct deposit. By setting aside 10% of your net monthly pay, you should reach your goal in about two and a half years.
- Make wise investments
Your emergency fund should not be placed in your checking account. To build your cushion, it is best to opt for a tax-free savings account (TFSA). Why? Because all your investment income is tax-sheltered there.
With a TFSA, you can grow your money through several types of investments. Contributions are not tax-deductible. You have already paid tax on the amounts paid in; you do not have to pay any on the quantities withdrawn or on the accrued interest.
You can withdraw money whenever you want, for any reason, but be aware that the withdrawal can sometimes take a few days. This is an excellent way to protect against impulse purchases!
- Consult an advisor
The counsellor will assess your situation and help you make a plan to:
save;
take full advantage of savings opportunities;
balance your short and long term goals.
For example, the advisor might determine that you are entitled to a tax refund if you contribute to your Registered Retirement Savings Plan (RRSP). You could then deposit this amount into your TFSA.
Were you thinking of buying your first home or going back to school? Know that you do not have to dip into your savings and other possible options. Whatever your needs, an advisor can help you assess your financial situation and your goals to prepare an effective plan. five tips for creating an emergency fund (audio)
