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Money Advice for Life
Top 4 emergency fund tips
Financial gurus frequently mention that having an emergency fund worth three to six months of your normal expenses is crucial to financial success. With that in mind, we set out to answer the top 4 things you need to know about emergency accounts.
1. How do I start?
They say a journey starts with a single step. The same is true of creating an emergency account. No matter your stage in life, having money available to cover both small (i.e. vet bills) and large (i.e. job loss) unexpected changes in your finances can drastically reduce your stress. What you invest in is less important than building the funds to cover these scenarios!
2. What type of account should I save in?
Start by creating an account specifically for emergencies. The key to an emergency fund is having quick access to your money without paying significant fees for transfers or being subject to a market downturn. A high interest savings account is a good choice. If you have room inside your Tax-Free Saving Account, you can hold your “emergency focused” high interest savings account there, which will save you money on taxes.
**Masterclass Hack** As your emergency fund grows, you may want to keep a portion of it in your high interest savings account for smaller emergencies, while holding the other portion in a low-risk investment to take advantage of higher returns. This option carries higher risk and is only recommended for those who have multiple months’ worth of emergency funds saved.
3. How much?
Set up an automated transfer from the account where you receive income to your emergency account. How much? Consider the amount you can afford without needing to move the money back to your primary spending account!
**Behavioural hack** By setting the automated transfer to the same day you get paid, you may forget the transfer even happened and simply get used to living on what remains in your spending account. As you gain momentum, think about elevating how much you save as your income grows. For example, if your salary goes up by 5%, boost your emergency fund contribution by at least that amount.
It may seem far away, but at some point, you will reach your 3 to 6 months’ worth of expenses goal! Once you are there, it is time to focus your extra funds on your other financial goals.
4. I have an emergency! Now what?
We’ve all been there. It’s minus 40 and the furnace stopped working… The good news is you set this money aside for a reason and now you don’t have to stress the unexpected expense! Having a good understanding of what it will take to refuel your emergency account should be something you learned from your journey so far. Rebuild that account!
Want more information on building your emergency fund? Our Conexus financial gurus are just a call or email away!