Sarah Twomey | Desjardins Group
According to the wealth management experts at Desjardins Group, being financial prepared for an emergency is essential. As we've heard often in the media over the years is that carrying too much debt and having too little savings can be dangerous to your personal finances to the ongoing financial volatility. This is especially true if you needed emergency funds due to an illness, accident or a job loss. Building financial stability takes discipline and hard work but pays off when the unexpected occurs.
Simple scenarios where an emergency fund would have been handy:
- You had money set aside to replace your aging car, but your roof has started leaking. One option is to use credit to replace the roof and buy the new car with cash. But now you're in debt. An emergency fund would have given you the flexibility to afford both the roof repair and the car without incurring additional debt.
- If you lost your job or got sick, you'd need cash to pay for everyday expenses (groceries, rent, etc.). An emergency fund would give you something to fall back on and peace of mind while you look for a new job or take the time to recover.
Can't I use my credit card, line of credit or RRSP in an emergency?
Lines of credit and credit cards are for temporary expenses that you'll be able to pay off within a month or so. They're not ideal for sustained periods, like being out of work for six months. Some credit cards charge 19.5% interest on cash advances, meaning that you'll have to repay the amount you borrowed plus an additional 20%. RRSPs should not be touched until you retire, unless you plan on using some of these savings for a house down payment. Any withdrawals you make will be considered income on your next tax return, which may result in a year-end tax bill.
How do I start an emergency fund?
Financial experts suggest that a solid emergency fund is the equivalent of three months' worth of living expenses. For example, start by saving the equivalent of one month's worth of groceries and then work on the other monthly expense categories one month at a time. With each paycheque, try to put aside the equivalent of 1 to 10 per cent of your income. Don't forget to put it into a separate account, like a TFSA, so you're not tempted to dip into it. Keep in mind that it's more important that you're starting a savings habit than the total amount that you're saving each month. And remember: don't go into your emergency fund unless it's an emergency. A couch on sale that you simple can't live without doesn't count as an emergency!