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How You Can Build Up an Emergency Fund

Having an emergency savings fund is important. After all, you never know when an unexpected expense will come up. If your car breaks down, your roof springs a leak, or you lose your job, you will need to access to cash  quickly. If you don’t have an emergency fund, you could find yourself borrowing more than you can afford. Not having an emergency fund is a big reason why a lot of people end up in debt trouble: something unexpected happens and they have to borrow to pay for it.

However, despite how important an emergency fund is, many Canadians don’t have one. A 2015 BMO survey found that 56% of Canadians say they have less than $10,000 in emergency savings while 44% have less than $5,000, and 21% have less than $1,000. In fact, a separate CIBC poll, conducted by Harris/Decima, found that 45% of Canadians do not have an emergency savings fund at all.

A survey by the Canadian Payroll Association found that 59% of Canadian workers say they would be in financial difficulty if their paycheque was delayed by a week.

Without an emergency fund, life’s unexpected costs can cause serious financial issues.

Whether you’ve recently used up your savings in an emergency, or if you are just starting out with saving, here are some tips for building up an emergency fund.

Start Small

You may have heard that you should have three months of expenses in savings, or six months of expenses, or some other amount. This advice can be well-meaning, but it can also make saving look intimidating. Hardly any of us can save six months of expenses in a short time. These kinds of goals take years to achieve.

To make it easier and to keep yourself motivated, start with smaller goals. For example, decide that you want to save $20 a week. That means, in ten weeks, you will have $200 in your emergency savings account. This $200 in savings can be a big deal when your hot water heater breaks and you need to replace it, but it’s not an overwhelming goal.

Slowly increase the amount that you save until you’ve built up a reasonable fund.

Remember to Clearly Define an “Emergency”

One reason that a lot of people can’t build up an emergency fund is that they use their emergency savings for things that aren’t really emergencies. For example, if you have a larger phone bill this month than you expected, and you use some of your emergency fund to cover it, you have less available when you there’s an actual emergency.

Define what an emergency is to you (a job loss, a car repair, a broken appliance, etc.) and only use your fund for these purposes. How do you then deal with situations like a larger phone bill? The key is budgeting.

Have a Budget

If you don’t already have a budget, you’ll need to make one. Start by writing out your fixed expenses. These are things you can’t easily change: your mortgage/rent, car payments, debt repayments, etc. Add up how much these cost you each month. Whatever you have leftover is for variable expenses. These are costs that you can, at least somewhat, adjust to fit your situation.

Variable expenses include food, transportation, entertainment, clothing, and anything else that you spend money on. Calculate how much you spend on each of these categories and write it down.

Remember to put everything in your budget, including debt repayment costs and anything else you spend money on. Don’t forget to allot for birthday gifts, special occasions, etc. Of course, you’ll need to also include an emergency savings category in your budget.

Round Up

It’s a good idea to “round up” when you’re budgeting. For example, if your phone bill usually $67 each month, budget $70. If your car payment is $436 a month, budget $440. This will give you some wiggle room if a certain expense is a little more than you expected it to be. This room means you won’t need to raid your emergency fund to cover a higher than expected cost.

Cut Expenses

Depending on your financial situation, you might find it difficult (or nearly impossible) to put aside an extra $20 each week. When you’re spending your entire paycheque as soon as you get it, there simply isn’t anything leftover for savings.

If you’re in this situation, you’ll need to look at your budget and see where you can make cuts. Maybe you can spend less on clothing, switch to a more cost-effective cable package, or spend less eating out. You could talk to your phone company about changing to a cheaper plan, or shop more sales to reduce your grocery budget. Do whatever you can to reduce costs.

You may also find some success by contacting your creditors, explaining your situation, and asking them for a reduction in your payments, such as a lower interest rate.

“Find” More Money

If you want to have more money in your emergency fund, think of ways to make or “find” more. Do some part-time work when you have the chance or consider some freelance jobs, if possible. You can also hold a garage sale or sell some unwanted items online. This can get you the extra money you need to build up an emergency fund.