Whenever Mark Perkins notices that his bank account is a bit flush at the end of the month, he quickly transfers money into a savings account marked for emergencies. Perkins, who lives with his wife and three daughters in Toronto, has managed to accumulate $30,000 over six years for unexpected expenses. “We wanted enough to feel comfortable if one of us lost our job or if we had a string of breakdowns in the house, because things always seem to break down at the same time,” he says.
Perkins is doing something that most people in Canada aren’t. According to a 2015 survey by Pollara, a strategic insights firm, 44 percent of Canadians have less than $5,000 socked away for unexpected expenses, and a quarter of working Canadians are living from paycheque to paycheque with no emergency cash at all.
“We’re seeing more and more people who have no emergency fund: They lose their job and they’re in immediate financial difficulty,” says Laurie Campbell, CEO of Credit Canada Debt Solutions, a non-profit agency. “Yes, it’s hard to save, but it’s way more stressful to find yourself in a situation where you’re in financial difficulty because you didn’t plan ahead.”
Since emergencies pop up all the time – a roof might start leaking, or someone might get sick – everyone should save something. Yet most people don’t know how much to save, or even how to do it.
Since emergencies pop up all the time – a roof might start leaking, or someone might get sick – everyone should save something. Yet most people don’t know how much to save, or even how to do it. Here’s some advice to get you going.
Ideally, the amount of money in your emergency fund will equal three to six months of your take-home salary. “That’s because it can take that long to find a new job if you lose yours,” says Campbell. But Stephanie Holmes-Winton, author of Defusing the Debt Bomb, says that at the very least, people should save enough to cover their basic needs, like buying food and paying the household bills. “It’s what you need to live,” she says.
Pay yourself first
While Perkins has managed to save money by adding leftover cash to his emergency fund, others would be wise to put a little bit of money into their fund every month, says Campbell. Set up an automatic transfer into a savings account on the day your pay gets deposited. Some employers may even be able to put part of your pay into a Canada Savings Bonds on your behalf.
When you get a sudden windfall of money – perhaps a bonus at work, or an unexpected tax refund – don’t blow it all on a vacation. Divide that money up: Put some of it into an emergency fund, some into an RRSP and use a little for something fun. “It’s more rewarding to have something to show for it than to spend it all at once,” says Campbell.
Beware of credit
Some people wrongly assume that if they have a line of credit, they don’t need an emergency fund. “If you’re drawing on a line of credit, then you’re getting yourself into debt, and whatever you’re buying is costing you more money than it should, because of interest,” says Campbell. The other concern is that if you get too comfortable with one kind of debt, it can snowball into other types, like credit card, which can be extremely expensive. It’s always better to pay for those emergencies in cash.
So far, Perkins hasn’t had to draw on his emergency fund, but there were a few times when things looked tight and he and his wife were glad it was there. And if their roof starts to leak or that old tree in the backyard finally has to come down, Perkins knows he’ll be able to fork out the cash stress – and interest – free.