An emergency fund is a great thing to have. It consists of savings set aside for a rainy day when you have expenses you can’t otherwise cover. Unlike an investment, it’s kept liquid so that you can access it right away, most often in a savings account or high-interest account with a bank. But when should you spend your emergency fund? And once you’ve spent it, how do you replenish it?
When Should You Spend Your Emergency Fund?
If you can get by without burning through your emergency fund, it’s worth the effort. But for a real emergency, it’s better to use savings set aside for that purpose than going into debt and relying on credit cards. Great reasons to use your emergency fund include:
- Losing your job,
- Your spouse or partner losing their job,
- A medical emergency or injury that keeps you from working,
- A house fire, wildfire, or natural disaster disrupts your life.
Going into debt to cover sudden, unexpected expenses can lead to you having to arrange a debt settlement with a licensed insolvency trustee in BC. A consumer proposal or bankruptcy can effectively get you out of debt when your options are otherwise limited, but they will impact your credit rating and your future ability to qualify for loans.
What Not to Spend Your Rainy-Day Fund On
It can be tempting to dip into savings for a number of reasons, especially if you’re caught short. However, if you can reasonably anticipate the expense, you should save for it separately because you know it’s coming. Otherwise, you can end up leaning on personal savings as a crutch and end up depleting them. Avoid the temptation to spend your rainy-day fund on:
- One-time costs that are predictable, such as property taxes, holiday gift-buying, or fees like car registration, passport renewal, etc.
- Occasional costs like car repairs or replacing appliances in your home. You know you will have to pay for them, but you can prepare ahead by setting money aside for the inevitable. Just because the timing is unpredictable doesn’t mean the expense is.
- Everyday expenses if you are working and making an income. Living beyond your means is a worrying financial sign. Without savings, you would be relying on debt to cover those costs.
How to Replenish Your Emergency Fund
It can feel discouraging once you use up your personal savings. It wasn’t exactly easy getting them there in the first place. But there’s no shame in using them. That’s what the money was there for. And now that you’ve gotten yourself out of a tough spot, you understand how important it is to have an emergency fund. The best thing to do is take it step by step.
#1 Start with $1,000
Start small. When you set aside $1,000, you’re giving yourself breathing room for those surprise expenses. Spending money you already have is always cheaper than relying on a credit card.
#2 Pause Your Other Money Goals
Put your other goals on the backburner for now. That dream vacation or that new car can wait until you’re back on your feet.
#3 Track Your Spending
The best way to identify bad spending habits is to keep track of every purchase you make for a month. You can see where you’re spending too much as it happens and cut back appropriately. Bad spending habits often seem deceptively harmless, but as those decisions accumulate, they can lead to bigger financial problems.
#4 Set Aside Part of Each Paycheque
The best way to build savings quickly is to make it automatic. Set up an automated withdrawal from your chequing for each month or each pay period to take a fixed amount and put it in a separate savings account.
#5 Temporarily Work a Side Job
Saving extra money is tough. If you don’t want to cut expenses, one way to build up your savings is working a side job temporarily and setting all of that money aside (or depending on your job, picking up extra hours at your main job). Working more than one job can be stressful in the long-term. Set a savings goal and once you reach it, you can go back to normal.
Savings vs CERB?
There are more Canadians than ever facing income loss as a result of COVID-19 and many are having to turn to their emergency funds. Some Canadians find themselves asking if they should apply for supports like the Canada Emergency Response Benefit if they have personal savings to get through a temporary job loss.
The CERB is available to a wide range of Canadians who have lost their income due to the global pandemic, regardless of their personal wealth or savings. Like EI, the CERB replaces employment income with no relationship to your assets.
Anyone who needs support during the Covid-19 crisis should access it. At $2,000 a month, CERB may not even be enough to cover all of your expenses, and you may need to draw on your personal savings. You will have time to replenish these funds once you’re working again.
COVID-19 has been an exceptional event with a major impact on the economy. If there has ever been a time to access emergency savings, this is it.
What You Can Do If You’re In Debt After an Emergency
When you don’t have any emergency savings, you may have to rely on debt to make ends meet. That debt can have a lasting impact even once you get back to work, as debt repayments will shrink your budget. Talk to licensed insolvency trustees in BC to find out what you can do with your debt. You may be eligible to file for a consumer proposal or bankruptcy to eliminate your debt, or you may just need a plan to budget your money to tackle it.
Good financial health involves an emergency fund. It can be tempting to dip into, but it should be reserved for truly unexpected expenses or times when you have lost your income.