We take a look at why an emergency fund is so important, how to start one up, how to grow it faster and how to manage it.

Why you need an emergency fund
If there’s one thing you can expect in life, it’s the unpredictable, which can come along with alarming regularity and be very costly. If you don’t have an emergency fund in place to cover those unexpected but essential costs, you would have to either dip into your savings or go into debt.

Typical emergency expenses include:

• Vehicle repairs
• Major home repairs (such as a new furnace, new roof, new windows, etc.)
• Medication for a health issue
• Major vet bills
• Job loss

Having a large, unexpected expense and no emergency fund can set your financial plans back a long way.

How to set up your emergency fund
Advisors often suggest your emergency fund should be able to cover between three to six months of expenses. Given that this can often run to thousands or even tens of thousands of dollars, this can be an overwhelming task at first. However, the trick to starting an emergency fund is to begin small and build it up gradually.

Start by making regular contributions (even if they’re small ones), give yourself plenty of time and have realistic goals. You can start off with the goal of saving a month’s worth of expenses. This might take as long as a year or more to reach, but as long as your emergency fund keeps growing, you’ll get there. Once that first target is reached, set a new target of two months of expenses, and so on.

Work out a regular amount that you can afford to put towards your emergency fund from every paycheque. If you struggle to find money to save, take a long, hard look at your expenses. There are a number of strategies to help you make savings, which would free up the money you need to build your emergency fund:

• Take leftovers for lunch at work
• Make your morning cup of coffee at home and take it with you
• Shop around for lower service providers, such as Internet and TV
• Use a cell phone broker to get a cheaper plan
• Shop around when it’s time to renew your home and auto insurance

Once you have a figure in mind to save every paycheque, open a new savings account that is only for your emergency funds. Next, set up automatic payments from your chequing account to your new savings account, on the days you get paid. This is crucial; by automating your savings, you’ll be less tempted to spend the money on other, less important things, and the money will grow without you even having to think about it.

How to grow your emergency fund faster
In the early days of growing your fund, it can be disheartening to see the small amounts that it contains. You can grow your fund faster by adding larger contributions from these sources:

• A tax refund
• A pay rise
• Proceeds from selling unneeded possessions (such as a vehicle, jewellery or furniture)
• Gifts of money
• An inheritance
• A work bonus

How to manage your emergency fund savings
The most important way to save successfully for an emergency fund is to understand what it’s for and to use it only for those purposes. Your emergency fund is not meant to pay for regular expenses, such as an oil change or an unusually high utility bill.

Nor should you use it for any expense that you can put off until you’ve had a chance to save up for it. And your emergency fund certainly shouldn’t be used to fund a vacation, pay off a credit card bill or use as a down payment on a new home.

If you do have a real emergency on  your hands (an unplanned, major expense that’s not part of your budget), don’t hesitate to use the money to pay for it; that’s what it’s for, after all.

Where to keep your emergency fund savings
This will require a bit of a balancing act. On the one hand, you want the money to be easily available, so you can access it fairly quickly. On the other hand, you don’t want it to be earning low interest, as your savings’ buying power will diminish over time, due to inflation (and if an emergency doesn’t come along for a long period of time, you could have the money in your account for years).

A guaranteed investment certificate (GIC) or term deposit can bring you considerably higher interest rates than a regular savings account, and it’s a safe investment. If you invest in redeemable (or cashable) GICs or term deposits, you can withdraw your money at any time with no penalty.  

If you have sufficient contribution room, holding your GIC or term deposit within a Tax-Free Savings Account (TFSA) will mean that your savings grow with no tax deducted.

Your Cornerstone financial advisor can help you to open up a term deposit within a TFSA and arrange for automatic payments to be made from your chequing account. Contact us at 1.855.875.2255 today at to arrange a meeting and start building your emergency fund.