Lamina’s Blueprint to Building an Emergency Fund from Scratch
It’s better to have it and not need it than need it and not have it, as the proverb goes. “It” in this case being an emergency fund to cover unexpected life events that might otherwise leave you in an uncomfortable financial state. Think of it as a buffer between you and the financial stress of an unforeseen circumstance, like a sudden job loss, an urgent home repair, or an unexpected medical bill. Building one from nothing may seem a daunting task, but with a clear blueprint, it is an achievable (as well as essential) goal anyone can implement in their own lives. Creating this financial cushion doesn’t require a massive income (making it all the more accessible and attractive for any average Joe or Jane). All you really need is a commitment to a structured plan and consistent action.
Here is a blueprint to building your emergency fund from scratch:
1. Define Your Target and Start Small
The first step for any financial undertaking is to set clear goals so you know what you’re aiming for. A common rule of thumb to guide your emergency fund is to save enough to cover three to six months of essential living expenses. To figure this out, calculate your absolute necessary monthly costs: rent or mortgage, utilities, groceries, transportation, and insurance. For instance, just as you might compare costs for everyday needs like flower delivery in Guelph, breaking down your monthly essentials helps you see where your money goes. Once you have this average, multiply it by three to hit that 3-month minimum. This is your initial target. Don’t be discouraged if the final figure is a little pricier than you anticipated; this is step one, and you’ll work on cutting the number down bit by bit. Start with a smaller, more manageable goal, such as saving your first $1,000. Reaching this first milestone will provide a powerful psychological boost to keep your morale high, and provide a tangible safety net for minor emergencies, both of which can spur you to continue toward your larger goal.
2. Open a Dedicated Savings Account
Your emergency fund should be liquid and accessible for ease of access when a crisis strikes, but not too accessible to keep you from temptation. Keeping it in your daily chequing account is an easy way to keep it on hand for non-emergencies. One easy solution to keep the money away from the temptation to spend it is to open a separate, dedicated savings account. A high-interest savings account (HISA) or a Tax-Free Savings Account (TFSA) are excellent options in Canada. These accounts keep your emergency money separate (reducing temptation) while also allowing it to grow with interest (tax-free in the case of a TFSA). This approach keeps those funds from being too accessible for your day-to-day needs, but close enough to access quickly and without penalty when a true emergency strikes.
3. Automate Your Savings
The most effective way to build your fund consistently is to “pay yourself first.” Treat your savings contribution like any other bill and find ways to pay it automatically and keep that spending out of your hair. Set yourself up so that each payday your chequing account adds some of your paycheque into your emergency savings account. Even a small amount, like $25 or $50 per paycheque, adds up significantly over time. Automating the process removes the need for willpower and conscious effort, while also ensuring that you are consistently building your fund without having to think about it. And as an added bonus, you won’t miss the money you never see in your bank account in the first place.
4. Find Extra Cash to Accelerate Your Fund
One common piece of advice is to work smarter, not harder. In the case of building your emergency fund, any source of additional income should be welcome. Look for opportunities to direct extra money towards your emergency fund. This could include tax refunds, work bonuses, or raises. Scrutinize your monthly budget for expenses you can temporarily reduce or eliminate to meet your goals. Perhaps it’s brewing your coffee at home, packing your own (homemade) lunch, or cancelling a subscription you rarely use. Even small lifestyle adjustments, like opting for affordable wellness options such as massage therapy in Ajax instead of costly vacations, can free up funds. Every dollar you can redirect will speed up the process and make it easier to hit those milestones on your way to a more sizable fund. Take the time to consider other elements of your financial situation as well. For example, once a debt like a car loan is paid off, redirect that former payment amount straight into your emergency savings.
5. Replenish and Re-evaluate
Once you use your emergency fund for a legitimate crisis, your priority should be to replenish it back to your target amount. Pause other savings goals if necessary and focus on rebuilding your safety net. That safety net is all-important, given that it’s your emergency fund for major life crises, and any goals that can wait for the moment can be put on hold to restock your emergency fund. Life circumstances also change (perhaps you might move, get a new job, or grow your family) and so your finances will need to be adjusted along with the rest of your life. Periodically re-evaluate your three-to-six-month expense target to ensure it still aligns with your current needs, and adjust your savings plan as required to keep yourself on track come what may. If need be, you may also want to keep track of other financial tools and resources (such as Lamina or other resources you may be aware of) to help fast-track replenishing your emergency fund and rebuilding that all-important safety net for the future.
When it comes to building an emergency fund, there’s no reason the job has to be difficult. With a little effort and dedication, you can not only build your fund, but grow it to better prepare you for any unexpected crises, and rebuild it if you use it. With this effort, you too can take some steps to keep yourself prepared at all times in spite of any curveballs life might throw at you.