How Are You Using Your Emergency Fund?

We’ve all heard about the importance of having an emergency fund and many Canadians have them nowadays, however, it appears that many Canadians aren’t using them for their intended purpose.  Rather than setting aside the funds for true emergencies, many folks are using these funds for day-to-day expenses and completely defeating the purpose altogether.

How should emergency funds be used?

Your emergency fund should not be touched unless a true emergency takes place.  The purpose of having these funds is to give you peace of mind in knowing that if your financial circumstances dramatically change, you and your family will still be able to stay afloat, at least for a few months.

What kind of account should I use for emergency funds?

I would recommend putting your emergency funds into a high interest savings account or a Tax Free Savings Account.  The key is to make sure the funds can be available to you when you need them.  You need easy access to the money in the event of an emergency, so make sure you don’t lock these funds into a nonredeemable investment.  And, please do not put your emergency savings into an RRSP.

What can I do to prevent myself from spending my emergency funds?

Make sure that this account is not attached to your debit card.  That way you won’t be tempted to spend this money on regular purchases.  If you use a Tax Free Savings Account it will likely take you a day or two to get access to your funds and TFSAs are not attached to bankcards, either, so this may be the best route to go if you have difficulty reining in your spending.

What can I do to make it easier to save for emergencies?

The easiest way to save for anything, including emergencies, is to set up preauthorized payments into your savings account or TFSA on the same day that you get paid.  That way you won’t even miss the funds and you will be saving automatically rather than having to remember to tuck some money away each payday.  Remember, setting up a preauthorized amount is not set in stone.  You can always change it to make it more manageable if your circumstances change.