Some may question the need for an emergency fund. After all, you’re working hard, doing everything you can to make sure you can pay your bills and expenses. Such a fund can help you avoid high-interest debt, and it helps reduce stress. After all, life is full of changes and having that “cushion” can help you feel ready and calm.
Why should you also have to worry about an emergency fund? Here are some reasons why you should have one:
1. Helps You Avoid Borrowing
It is easy to go overboard when you’re in debt. You may often find yourself asking for more loans or lines of credit, even if you have enough to cover your monthly expenses. Having an emergency fund can help you avoid the temptation of borrowing again, especially if you’re just starting to make a dent in your debt.
2. Helps You Save Money
Money saved is money earned. Having an emergency fund helps you save money. If you’re always worried about your finances, you could start to spend less money on unnecessary things. Having an emergency fund also helps you save money in the long run, since emergencies don’t happen often. It’s easier to control yourself when you have an emergency fund.
3. Helps You Prepare for Emergencies
You will be more prepared for emergencies if you have an emergency fund. If you have an emergency fund, you can save up for a new car, medical expenses, or whatever your emergency may be. You’ll be able to focus on your finances because you don’t have to worry about how you’re going to pay for an unexpected expense.
4. Helps You Avoid Credit Cards
An emergency fund can also help you avoid using credit cards to pay off your expenses. If you have an emergency fund, you won’t have to worry about paying for a big emergency out of your pocket. This will save you from the temptation of using your credit card to pay your bills.
5. Helps You Get Out of Debt
Having an emergency fund can help you get out of debt faster, since you won’t have to worry about paying for unexpected emergencies. This will reduce the amount of debt you have to pay off, and will help you get out of debt faster.
How Do You Start an Emergency Fund?
First, figure out what your monthly expenses are. Calculate what a total of three to six months‘ worth of living costs is and set your goal to save that much in a separate fund for emergencies.
Next, decide where to keep the emergency fund. A savings account is the most common place to keep it. Then, determine how much you‘ll contribute to the fund each month. Experts recommend saving at least 10% of your income. If you can‘t do that right away, start with 5% and work your way up. Make it automatic. In fact, the best way to start an emergency fund is to have your bank automatically transfer money from your checking account into your savings account each month. Take a portion of your paycheck regularly each month and put it into the savings account. Otherwise, make it a habit to put money in your savings first and foremost, and then take care of your other expenses after.
What If Your Salary Is Low?
Even if you are in a job that pays a low salary, you can still set aside something each month. Try starting at 5 percent of your paycheck each month. It will take you longer to reach your savings goal, but it will accumulate over time.
What About Insurance?
One way you can avoid needing to draw money from your emergency fund is to buy insurance. This can help you guard against some of life’s unexpected costs, such as car repairs, major home repairs, and medical expenses. If you lose your job or get into an accident that renders you unable to work and you have insurance in place beforehand, it could ensure you keep income flowing if you’re unable to work.
The Powerful Combo
Doing both is a smart idea. Having an emergency fund and buying insurance against other kinds of emergencies lets you cover your bases two ways.
Consult with a Certified Financial Planner to help you determine which types of insurance suits your goals best.
If you’re unsure how much you should be saving in case an emergency strikes, talk with a Certified Financial Planner. At Pension Solutions Canada, we can help you determine which option is best for your circumstances. We’ll also help you with estate planning, address tax minimization, and answer all of your questions.
Call us at 1-888-554-6661 to get started. Our services are no cost to you.