Why having an Emergency Fund should be your first step
We’ve all heard the term Emergency Fund but what does it really mean? You may have savings or investmests but are those really for emergencies or do they already have a purpose? Today we explore why you need money stashed away specifically for Emergencies.
What is an Emergency Fund?
An emergency savings fund protects your regular savings account from those unexpected expenses like a parking ticket, a surprise visit to the vet, broken cell phone or in a real bad case, unexpected unemployment. This account is used strictly for emergencies and should be pretty easy to get the funds.
How much is enough for an emergency fund?
We recommend you should have at least 6 months of living costs in your emergency fund. This covers you in case of unemployment, including rent, utilities, transportation, outstanding bills/fees, groceries, etc. If you don’t know your cost of living, the best way to figure it out is to gather all your expenses that you have a list them out. Living costs, transportation, food, etc. Whatever you need to survive. Take that number and multiply it by 6.
The Unspoken Benefit
One thing that is undeniable about an emergency fund is how it makes you feel. It’s hard to imagine if you’ve never had one but when you know there are 6 months worth of living expenses stashed away you just feel better. You have less stress and know that you can handle anything (most things) that can pop up on you.
Exploring your options
Seeing the suggested amount as a whole may seem a little daunting, but you don’t need to come up with your emergency fund all at once. We suggest it’s the first goal you should tackle because if you don’t and something comes up, you guessed it, all that hard work was for nothing. You’ll feel crushed! Having that emergency fund set up protects the rest of your plans.
You can use a savings account and allot a certain amount of each paycheque to your emergency savings fund until you reach your goal, wherever you decide to store it.
Some people love seeing all their money in one place. Others feel more comfortable knowing that money is just far away enough that they can’t access it very easily.
A high-interest savings account
When it comes to any kind of savings, using some form of an investment account is always a good option. With an investment account, you will benefit from earning interest. It’s getting paid for leaving your money sitting there, even if the rate of return isn’t much.
A piggy bank
Those who work for cash, commission and tips may find themselves with a lot of cash on hand (Bartenders & Servers know this all too well). It’s very hard to not spend the cash when it’s in your pocket. It’s important to regularly put aside a portion or even all of it everytime you get paid. It will be pretty cool seeing your money piling up if you get a see through piggy 🙂
Disclaimer: A piggy-bank won’t earn you any interest but visually seeing your money pile up and being able to physically touch it can be a motivator to continue with this awesome habit.
A Tax-Free Savings Account
A TFSA is a also good place to put your emergency fund because it’s still very easy to get to and you’re not taxed on the amount of interest you make. And compared to an RRSP, you’re also not obligated to replace the amount you withdraw, giving you the freedom to use your money whenever you want.
While it’s called a savings account, it’s actually an investment account. You can store different types of investments in that account like mutual funds, GICS, stocks and bonds.
You need to be able to handle unexpected things when they come up so before you think about investing make sure you have a good foundation with a solid emergency fund.
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