Why You Should Save for Emergencies
You never know what can happen in life. That’s what makes it interesting, but that’s also what can make it difficult. This unpredictability is why you need to have an emergency fund. You never know what is going to happen. Your roof could start leaking tomorrow, your refrigerator could break down, or your car could need a major repair. These things happen without warning and, when they do, they can cost you a lot of money.
If you don’t have money put aside to deal with such emergencies, you’re likely to end up in significant debt trouble. This is especially true if you’re living paycheque-to-paycheque. If you spend all of your money on living expenses and bills, and then you have to borrow more to afford a sudden expense, you could find yourself in more debt than you can afford to repay.
The situation can be even more difficult if you lose your job. Many job losses are unexpected and, even if your work provides some severance or if you are eligible to receive employment insurance benefits, it is still incredibly tough to live off of a reduced income while you are unemployed. Having an emergency fund makes it easier to afford your expenses until you are able to find a new job.
The same is true if you are sick or injured and are unable to work. You may be able to earn an income in the future, and you may have some benefits to help you until that time, but it can be incredibly difficult to make ends meet in the short term if you don’t have an emergency savings fund.
How to Build an Emergency Fund
If you’re currently on a tight budget and struggling to make ends meet, it might seem impossible to put some money aside for emergencies. However, as mentioned, it’s very important that you do so. Putting a bit of money into an emergency savings fund each month is tough, but it’s easier than having to afford a huge expense later on. Even a small emergency fund is better than not having one at all.
Take a look at your budget and look for areas where you can cut. For instance, you can likely reduce your budget by cooking at home more and eating out less, by walking or cycling instead of driving, by cutting back on subscription services and other entertainment, and in many other ways. Once you’ve determined how much you can cut from your budget, focus on the amount leftover and use this amount as a part of your emergency savings goal.
It’s a good idea to put your emergency savings fund into a different account than your regular spending money. If it’s in a separate account (and potentially even with a different financial institution), you’ll be a lot less likely to dip into it in non-emergencies. Your emergency savings should be for emergencies, not to make up for budget shortfalls. Make sure you follow your budget closely so you don’t end up running out of money before you meet all of your financial obligations for the month.
How Much Should You Save for Emergencies?
In general, most experts suggest that people try to put aside three to six months of expenses. This means that your emergency fund should cover your monthly living costs for three-to-six months. Having this much saved for emergencies will give you some time to find a new job if you need to.
However, if you work in an industry where getting a new job will be difficult, or if you work freelance or contract jobs, you may wish to put more money aside for emergencies. In these cases, it could make sense to have six-to-nine months of expenses and possibly even up to a year saved.
This can seem like a huge amount (and it is) but no one expects you to save six months of expenses all at once. Start slow and build up your fund a bit each month until you reach your goal.
However, if you are paying off debt, you’ll need to balance debt repayment with your emergency savings. It’s a good idea to try to pay down your debt as quickly as possible, so you may wish to split your efforts between debt repayment and emergency savings to best improve your financial situation.