How Important Are Emergency Funds to Personal Financial Literacy
The winter of 2019 rang in a pandemic for New Year 2020. Early on, some countries tried to figure out what to do to contain the epidemic. The financial strain affected the population from a consumer and corporate level. Subsequently, many businesses closed doors for quarantine forever. At the same time, the death toll changed the lives of many people with pre-existing medical conditions. Other Canadians experience financial distress.
For example, COVID-19 emergency funds exceeded the amount of $962 million in additional resources across Canada’s provinces. In 2018, pre-pandemic statistics reflected the top 20% of income-earning Canadians had a median savings average of $41,393. The average Canadian had $825 in savings. After the COVID-19 lockdown, many people’s personal finance resources such as “rainy-day” funds, savings accounts, and emergency funds reserves have been depleted or are now non-existent.
“Sadly, if an emergency (like a car or house repairs) or a life event causes extra expenses or income interruption, many have to turn to debt to cover their costs,” adds Schwartz. “It’s well worth re-examining your budget and spending to see how you can accumulate savings to avoid a potential debt disaster.” – Jeff Schwartz, executive director at Consolidated Credit Counseling Society of Canada.
What Is A Financial Emergency?
Concerning a lack of planning, not making a budget is NOT a financial emergency! Furthermore, an expanding family (baby), house remodeling, and large ticket upgrades are purchases that can be budgeted. They are not emergencies to dip into your savings fund account. Personal finance planning says an emergency fund is for situations you could not see coming. These unexpected expenses are as followed:
Common Financial Emergencies
- Unemployment: Job loss, Furlough
- Health Care: Vet, Medical, Dental
- Natural Disaster: Hurricane, Flooding,
- Accidental Expenses: Car, Sporting,
- Death: Burial Cost, Death of spouse
Consumers often find themselves tempted by the emergency fund size once they contribute to the savings account. However, emergency preparedness is not a luxury. It is an important part of personal financial planning.
How To Start Saving To Build An Emergency Fund
There is a multitude of creative ways to begin the personal finance planning journey. First, saving for an emergency fund is achievable. Second, the process will snowball quickly if you commit to it. Third, saving money for your safety net can serve well in an emergency. Accordingly, contributing to a regular savings account every time you receive a paycheque will help build good habits.
- Developing the pay yourself first method is a habit used to take your focus away from “spend” and fixate on saving. Consequently, it entails depositing all income and revenue streams into a savings account. The need to physically move money from a savings account to spend enforces personal accountability and intent.
- Pay your debts on time. Credit card bills and car payments are monthly installments. Pay them on time to avoid late fees. Otherwise, it can work against your goal of funding your personal finance emergency fund goal.
- Use bank account automation. For example, sign up for payment authorizations to be deducted from your chequebook. Hence, automatically transferring payments usually results in savings from month to month.
- The amount of money in an emergency fund savings account should cover several months’ worth of living expenses over an extended period.
“As a rule of thumb, you should have at least three to six months of savings set aside as a cushion in the event of an emergency,” says Jeff Schwartz, executive director at Consolidated Credit Counseling Society of Canada. “Though many Canadians recognize the importance of having emergency savings, they are stretched too thin by their debt and other household obligations every month.”
An essential part of personal finance management includes building an emergency fund. Of course, this is where most Canadians are falling short of reaching their savings goal.
Planning Your Personal Finances
First, make the best of your paycheque. To start, figure out where you are spending. Likewise, gather all your expenses receipts, including necessary expenses, debt payments, and discretionary extras. Afterward, look for any costs that jump out and areas that could be reduced. Looking at months worth of credit card payment expenses, are you only capable of making minimum payments? If so, a debt consolidation plan might free up some cash that can help you regain control.
Keep one credit card on hand and cancel the rest. Then, you’ll have fewer accounts to track. Also, you’ll be able to stay on top of your expenses for your rainy-day fund. Try to use a single financial institution. Centralize your financial assets. Of course, the staff there can help you reach your personal financial goals faster.
Who Needs An Emergency Fund?
You. The difference between having an emergency fund and not having one is being able to pay financial obligations in an emergency. Indeed, the adage goes “Robbing Peter To Pay Paul.” In any case, it’s never a wise choice to choose one bill over another. Skipping payments can lead to late fees and negative credit scores.
Do you have enough emergency savings? Additionally, is it hard to stay on top of your debt and save at the same time? We can help. Call one of our trained credit counsellors (844) 329-5598 or check out our free online debt analysis tool to get started!