If 2019 is the year you promised to stop your bad spending habits in their tracks and ensure your savings go untouched, then maybe the old proverb “failing to plan is planning to fail” hits home for you. But what about the things that don’t make it into the plan? You know, those expenses that just pop up and need to be taken care of immediately?
It’s not uncommon to walk up to your car and find a parking ticket perched upon your windshield, or for your hot water tank to break down suddenly in the middle of winter, or to find yourself frantically looking for flights to visit a sick family member.
But since you don’t usually account for parking tickets in your monthly budget, what’s the plan? These things happen all the time, so it’s also time to expect the unexpected – big or small – and make an emergency savings fund.
What is an emergency savings fund?
An emergency savings fund protects your regular savings account from those unexpected costs like a parking ticket, an overnight visit to the vet, death/illness in the family, or even prolonged unemployment. This account is used strictly for emergencies and should be accessible at a moment’s notice.
How much is enough for an emergency fund?
The suggested amount you should store in an emergency fund is the cost of living for three months in case of unemployment, including rent, utilities, transportation, outstanding bills/fees, groceries, etc. The easiest way to determine your cost of living is to gather all your monthly credit card bills and bank statements over the past year and get a monthly spending average.
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.
As with your regular savings account, you can allocate 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 setting up boundaries between what’s theirs to touch and what is strictly for emergencies. So whether or not you decide to keep your regular savings and emergency savings in the same spot, here are some reliable and easily accessible places to get your emergency fund started.
A high-interest savings account (HISA)
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 can benefit from interest earned, giving you the money you otherwise would not have. It’s essentially free money, even if the rate of return isn’t much.
However, as mentioned before, you want to make sure your emergency savings are easily accessible.
Thankfully, there are short-term investment accounts that allow you to withdraw your money anytime with little-to-no penalty or strings attached.
An excellent way to see your money grow is by looking into a HISA.
HISAs are usually only available from online banks.
And since they typically have lower carrying costs in comparison to the Big Five banks, they can offer you a much higher interest rate. Some people are hesitant to use an online bank, but if you become a member of the Canadian Deposit Insurance Corporation (CDIC), you can fully insure your money up to $100,000. And with interest rates as high as 2.35%, you can get quite the bang for your buck by applying for a high-interest savings account at RATESDOTCA today.
A piggy bank
Those who work for cash commission and tips may find themselves with a lot of cash on hand (Friday-night servers know this all too well). And instead of frivolously spending it, regularly putting aside a portion or even all of it can make a big difference in a short amount of time.
Now, a piggy-bank won’t earn you any interest, but sometimes visually seeing your money pile up and being able to physically touch it can be a motivator to continue saving.
But don’t get comfortable leaving your money here; If you are going to use this method to build your emergency fund, I’d recommend using it in conjunction with a savings account. Make it a practice to visit your piggy-bank every two or three months, and empty it into an account of some sort to secure your funds.
A tax-free savings account (TFSA)
A TFSA is a also great place to stash your emergency fund because it’s accessible at any moment, and you’re not taxed on the amount you withdraw. You’re also not obligated to replace the amount you withdraw, giving you the freedom to use your money whenever you please.
And while it’s called a savings account, it’s actually an investment tool where you can store different types of investments in addition to your cash, like mutual funds, GICs, stocks and bonds.
Though you can get the most out of your money by leaving it in there long-term, TFSAs are also good for short-term investments. And you can find the best TFSA rates Canadian banks have to offer at RATESDOTCA.