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Why You Need an Emergency Fund And How to Get One
January 13, 2021 | Posted by: Anthony Pillot
Building an emergency fund is something most people know they should do but few actually get around to doing it. A recent study found that nearly two-thirds of Americans did not have an emergency fund, and more than half would have trouble coming up with $1,000 on short notice. That lack of savings puts them at risk and makes achieving long-term financial goals much more difficult.
Building an emergency fund is a critical first step on the road to financial security, especially during these unprecedented times. Many people think that they do not make enough money to build an emergency fund, but even low-income workers can set money aside if they take the right steps. Experts suggest having a liquid fund of at least three to six months of living expenses. Let's start by exploring why you need an emergency fund.
You're Saving for a Goal
When saving towards a goal like buying a home or even starting a business, an emergency fund can help stop you from picking into your savings account when unexpected expenses arise. This can prevent you from moving backwards with these goals. If an unexpected situation does occur, you may progress slower towards your goal while your emergency fund is rebuilt. However, you were able to leave the money you were saving for yourself.
Paying Off Your Debt
An emergency fund can help stop the accumulation of debt and relieve some of the stress associated with ever-increasing amounts payable. Your emergency fund can assist in covering expenses that you don't budget for, like unforeseen car repairs or urgent dental work. Use parts of your emergency fund to take care of these stressful situations and make it easier for you to stay focused on getting out of debt, not accumulating more. This also facilitates paying extra money right away to reduce your current debt when you have a comfortable cushion for surprise expenses.
You Just Started Budgeting
When new to budgeting, you may accidentally leave out some of the expenses that you need to plan for and your emergency fund can cover most of these expenses for the first year. You can then add those expenses to your budget once you've identified them as they occur. Your emergency fund can help you adjust to your budget.
You Only Have One Income
If you only have one source of income, it is of paramount importance to have a significantly large emergency fund. It can help you get through many unexpected situations like loss of employment or illness that keeps the primary income-producer from working. Notably, the current pandemic situation has done exactly that and has left many Canadians and people all around the world without funds to cover essential needs. If you're a one-income family or single, it is critical to have at least one year's worth of expenses in your emergency fund. You can build an even larger emergency fund once you're free of any obligations & debts.
You're a Contractor or Self-Employed
Whether you're an independent contractor, self-employed or are employed with an organization that doesn't let you claim unemployment benefits, it's vital to have an emergency fund in place. Moreover, if you know that your contract may end soon, you should seek to gather more money in your emergency fund. This is because jobs with these types of employment are often insecure and without a guarantee that you'll receive a paycheck at the end of each month.
You Own Your Home
When you own a home, you will have to pay for all the essential repairs & maintenance. Even though you should set up a sinking fund to cover any renovations and most repairs, you may have unforeseen expenses like urgent plumbing issues, roof repairs, heating & cooling unit repairs and more. Your emergency fund can assist you in handling these costs and make your homeownership that much less stressful.
You Live Far Away From Family
It can be very costly to travel home and can be significantly more expensive if travelling last-minute for an emergency. It is good to have an emergency fund saved up to help cover for last-minute flights to home or other relatives in case of a medical crisis or a funeral.
It is clear that an emergency fund has many advantages and every family, even every individual, would benefit from one. Think of your emergency fund as an insurance policy against unexpected expenses. Now, here are some quick tips on how to start and accumulate an emergency fund.
Take Note of Daily Expenses
You may think you have no extra money to build an emergency fund, but those extra dollars could be hiding in plain sight. Take a few minutes to review your normal daily expenses, from that morning cup of coffee and lunch with coworkers to daily parking charges and the take-out pizza you grab on the way home.
Look for ways to economize and swap high costs for lower ones.
Bagging up your leftovers from last night's dinner could save you $10 or more a day. That's several hundred dollars a month. Making your coffee at home could save you $20 to $50 more while skipping the take-out once or twice a week could save you $100 or more. If your town offers public transportation, swapping your car for a bus or trolley could slash your parking charges and save you even more.
Start a Piggy Bank
Now that you have identified the leaks in your daily budget, you can use that knowledge to start building an emergency fund. Take that $10 you would have spent on lunch and place it in a special spot in your wallet. When you get home, transfer that cash to your new piggy bank and watch the money accumulate. When your bank is full, you can use the money to start the savings account that will become your emergency fund.
You do not have to confine your savings to folding money. Change works just as well, and it is much easier to accumulate. Every time you get change, keep it in your pocket until you get home, then transfer it to your piggy bank. You may be surprised at how quickly that spare change adds up.
At Primo Mortgage, We Do Much More Than Just Your Mortgage
We satisfy every client on their every need. Our expert agents would be happy to help you with your budget and strategize an effective plan for starting & saving your emergency fund. Contact us today!