A couple of summers ago, my husband and I were hit with a triple whammy of unexpected costs – a root canal for me, and two busted appliances that needed replacing. It all added up to a few grand in expenses we hadn’t planned on. The silver lining that summer was our emergency fund – a savings account we contribute to regularly to help us deal with the unexpected.
Unfortunately, this kind of cash reserve is something too few Canadians can count on according to the 2012 TD Canada Trust Report on Savings. According to the report, 38 percent of Canadians have no financial safety net to cover job losses, big medical bills or unexpected expenses like home repairs — and yet 53 percent say they’ve been in situations like these. Only 26 percent said they had a fund set up to help them cover the costs. In the group without an emergency fund, 49 percent had to depend on friends or family, 26 percent turned to credit cards, 35 percent drew on a line of credit or loan, 16 percent used their savings account and 14 percent tapped their retirement savings.
So why don’t Canadians have more money set aside to cover the unexpected? Over half say they’re too broke (56 percent) and another 46 percent say they’re too focused on paying off debts from credit cards or lines of credit. A smaller percentage said they were servicing a mortgage (14 percent) or saving for retirement or their child’s education (7 percent).
Now, I definitely think paying off debt and saving for retirement are solid priorities. The problem is that, without an emergency fund, major unplanned expenses can end up pushing you further into debt and farther away from your savings goals. Especially job loss – an emergency fund is exactly what you need to help buffer you and your family against loss of income over several months.
To help get you started, TD Canada Trust’s Raymond Chun offers a few pieces of advice:
1. Make it a priority: Aim to set aside three to six months of essential expenses.
2. Make it automatic: Set up an automatic transfer from each paycheque until you’ve reached your target.
3. Avoid temptation: Put your emergency fund out of easy reach so you can’t tap into it too easily.
Put your savings to work: Think about higher interest savings accounts or opening a Tax-Free Savings Account to get your money earning more.
If disaster strikes rebuild: If you do need to tap your savings, then make sure you make rebuilding it a top priority as soon as you’re back on your feet.