Sleep well knowing you’ve prepared a safety blanket in case of emergency
Many Canadians are experiencing firsthand the effect that a sudden unforeseen event can have on their personal finances. To be fair, the Covid crisis, for many, is a once in a lifetime event that came very abruptly, and few expected for it to have such an immediate and significant impact on our daily lives. However, in our everyday lives, sudden events such as a decline in health, the temporary or permanent loss of a job, or the need to take care of a loved one, can happen even quicker. The most common event comes from a temporary lay off, or termination of employment. Though this is most common, a sudden change in health can be much more severe and take much longer to overcome.
Although it is very important to start saving early and utilize the power of compounding, it is equally important that you have the financial means to be able to navigate a sudden short-term event. Relying on accessing retirement savings can have unexpected tax consequences and a catastrophic effect on your retirement, especially if you need to access these funds during a down market.
How much do you need to save?
There have been many articles written with varying recommendations ranging from 3 to 6, to 12 months worth of your monthly expenses. I usually recommend a 3-month minimum, but in many cases having a 6 month buffer would be advised.
Like any other financial decision, it is good to have the discussion with your advisor to determine what best fits your personal situation.
It is important to note that this number is based on monthly expenses, and not your monthly income. It is assumed that if there was a significant financial event, that you would cut out unnecessary spending such as eating out at restaurants, going on vacation, or renovating the home.
For many people the idea of having an emergency fund of 3-6 months seems unattainable, however just like starting a contribution to an RRSP or TFSA, by starting early and in small amounts the value can quickly accumulate.
How to start an Emergency Fund
There are any number of different ways to start contributing into an emergency fund. Any emergency fund is better than none, but a 5-minute call to your financial advisor can help you to set up and maximize the emergency fund and answer any questions that you have. We offer several solutions and encourage you to reach out if you would like to learn more.
Don’t be tempted to dip into your Emergency Fund
Lastly, the emergency fund should not be viewed as an additional savings account. The most difficult part of an emergency fund is to not be tempted to access it to go on a vacation or to buy a new car. The temptation to spend the money when it is not necessary (in the context of an emergency fund) can be very difficult. Depending on your spending habits we suggest having it in a separate account from your regular banking so that you are not constantly reminded of it, especially when mid February comes around and you are craving warmer weather.
Protect yourself and your family. Plan ahead!
Saving for retirement is crucial, however structuring a contingency into your retirement plan can ensure that you are prepared if an unforeseen event arises. In a time of a personal financial crisis, having an emergency fund can protect you from having to potentially compromise your retirement plan, as well as help you to rest easy knowing that if something happened, you have a financial plan and you can focus on getting back on track.