5 Reasons Why You Need an Emergency Savings Account
Along the path towards building a better financial future, you’ll need an emergency savings account set up to maintain strong financial health through difficult or unexpected times. If you don’t already have an emergency savings fund, this article will help you get started. We’ll discuss five reasons why you need an emergency savings account and provide you with a few money saving tips to get started.
What is an Emergency Savings Account?
An emergency fund is an account set up to handle any unexpected expenses. It is an account that you should only access in emergencies. Keeping accounts such as this separate from the rest of your finances ensures that you’re not dipping into these savings for ordinary expenses.
You should ensure that you’re careful with these savings if you decide to invest them. Since you won’t know when you need them, locking them away in GICs or RRSPs can cost you unnecessary penalties if you need access to them. Placing them in riskier, higher-return investments can also compromise your accounts by exposing them to potential losses.
How much should you save?
When it comes to building your emergency fund, how much you save depends on how much you spend every month. Use your budget planner to determine what expenses are absolute must-haves. Next, you should aim to save at least three month's expenses within your emergency savings account. However, if your income is unpredictable, such as commissioned salespeople or self-employed business people, you should plan for at least six months expenses.
Why is an emergency savings fund necessary?
We all know that life often forces us to face unexpected financial expenses. These can arise from many things like accidents and job loss to car trouble and last-minute maintenance. Below you’ll find 5 common reasons why you should be saving money for an emergency savings fund.
5 Reasons Why You Should Have an Emergency Fund
Accidents and illness
Accidents and illnesses rarely affect one person in a household. When the unexpected strikes, it is often entire families that face the economic impacts of a family sickness. As we’ve seen throughout COVID-19, many parents are staying home to care for children, impacting their ability to earn a living for the family.
Before 2020, approximately 140,000 Canadians lost income due to personal illness as well as caring for sick family members. When the main household income earner is unable to work, there must be an emergency financial reserve to help ease the effects caused by accidents and illnesses in the family.
At the beginning of the COVID-19 global pandemic, close to 20% of the Canadian workforce was forcibly unemployed. The long-term impacts of this virus will reverberate for many years, changing the way we work. Many Canadians have lost their job during this pandemic. Many of those out of work have relied on credit cards to bridge the gap in their finances.
Government programs like CERB and EI can help you cover some of the costs brought on by unemployment. However, for many Canadians, job loss affects their finances as well as their future life plans. For many, this means a change in careers requiring further education.
Building an emergency savings fund will put you in a better position to transition quickly, update your skills and find employment in your new career.
Owning a vehicle adds a lot of annual costs to your budget. If you don’t already maintain your car, you might want to start. Even though basic maintenance such as oil changes, alignment and replacing worn tires can add $1,500 a year to your expenses, not maintaining your vehicle can have more costly consequences.
If you’re not keeping your car in great shape, you could face a large unexpected repair bill when a problem crops up. If you rely on your vehicle to get to work, you will compound your financial problems if you face a loss of income. Having an emergency savings account available to get your car repaired is crucial to avoid further financial headaches.
Home repairs can become very costly if not planned for in advance. If you’re a homeowner, having an emergency savings fund set up is crucial. Should a large expense crop up, the funds you set aside today can help you avoid relying on credit to cover the expense.
If you’re planning to buy your first home, you might be unfamiliar with the ongoing costs of owning a home. You should start planning for those costs today. A general rule of thumb is to set aside three months of expenses to give you some breathing room when you move into your first home. So avoid putting all your savings towards the down payment and closing costs of buying your first home.
A home has many items that can be costly to fix or replace. Furnaces, roofs and HVAC systems tend to top the list of the most expensive home repairs. With costs ranging from $4,000 to $15,000 to replace these items, keeping up with regular maintenance and ensuring you have a budget set aside to replace these items at the end of their lives is essential.
Some mortgage companies offer warranties on heating, plumbing, electrical and other systems when buying your first home. These home warranty programs are often very cheap and can save you thousands of dollars over the years.
Support friends and family
We all hate to think of the idea that something awful could happen to our friends and family. For this reason, we always recommend our clients have life insurance that can cover a wide range of circumstances including accident and
illness, disability and death to protect themselves and their loved ones.
If you don’t have proper insurance coverage, or you have friends or family that need help, lack of financial preparation can be devastating. Providing financial support to friends and family can put a strain on your finances. So you should have proper insurance and also financial reserves to meet the needs of these eventualities.
Money Saving Tips
Saving is a necessary skill for all Canadians to have. As you can see, having an emergency savings fund ensures that you’re ready for life’s emergencies. So how can you build an emergency fund? You can learn some ways to save money with our article 25 Simple money saving Tips. Here are a few quick money saving tips to help you get started:
Carpool to work
Eat at home more often
Buy in bulk
Automate your savings
Pack your lunch
Make your coffee at home
Life is full of surprises. When those surprises bring unexpected financial loss, many Canadians find themselves devastated by the consequences. If you don’t already have an emergency savings fund, you’re not alone. According to this article by The Globe and Mail, less than one-third of Canadians have more than one month's expenses saved for a rainy day.
The key is for you to get started saving today. If you’re unsure where to start, check this article out to learn how automating your savings with Moka can help.