By Jasmin Brown - BDO Debt Solutions

BDO Debt Solutions

How an emergency fund can help you survive a crisis

Sep 1, 2020 | 9:53 AM

AOne of the toughest things about a financial emergency is that it can be emotionally and financially taxing. And if you aren’t prepared, you could find yourself adding to your debt load to survive the crisis.

Having emergency savings to cover unforeseen costs — like a car repair, a sudden layoff or a leaky roof — helps you avoid taking on debt and the stress that goes along with it. But not everyone has the ability to put savings aside for unexpected expenses. A 2019 study from the Financial Consumer Agency of Canada revealed that about two-thirds of Canadians have set aside enough emergency savings to cover three months of expenses. Unfortunately, Canadians who are more financially vulnerable, like lower-income Canadians, are more likely to fall short on emergency savings.

Why many Canadians don’t have a fund for emergencies

Aside from affordability, there are various reasons why Canadians decide to forego an emergency fund:

1. Bills and debt repayments come first. Consumer debt is high and budgets are often tight in Canadian households. People have credit card debt, bank loans and lines-of-credit to keep up with — along with mortgage payments to make and a family to support. It is understandable that immediate, obvious and ongoing expenses are prioritized and rainy day savings are put on the back burner.

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2. Interest rates have been historically low, which can create a false sense of security. Sometimes, there is less urgency to set emergency funds aside if borrowing is inexpensive.

3. “I have savings, I just don’t call it “emergency savings””. Some people view their savings as a “catch all”. That is, they have one pot of savings that they think of as flexible — it could be for retirement, vacations or emergencies. The downside: dipping into that savings account for an extensive vacation or unexpected emergency can cause you to come up short in the future.

Emergency savings: how much is enough?

Most financial advisers recommend having enough savings set aside to cover three to six months of expenses in an emergency. Having enough set aside to cover 12 months of expenses is even better. That might seem like more than you can manage, especially if your income has decreased due to the pandemic. If you are currently struggling to get by, or you’re living paycheque to paycheque, now may not be the right time to start an emergency savings fund.

However, when your finances are back on track and you are ready and able to start saving, you can begin by making small, consistent deposits. Try not to be discouraged by the total amount you need to set aside. Very few people can build a rainy day fund overnight. A high interest savings account or Tax Free Savings Account (TFSA) can help you keep your emergency savings separate and still accessible.

If you needed to access your emergency savings recently, revisit your budget once the crisis is over to start rebuilding lost savings.

What if I don’t have enough to cover my emergency?

Sometimes, even a well-padded rainy day fund can’t fully cover your costs and you need to rely on credit cards or a line-of-credit. If you are trying to reduce your debt load after the crisis is over, these useful resources and tools can help. It is important to get debt help sooner rather than later. A Licensed Insolvency Trustee (LIT) can help by providing information about budgeting, credit management and debt repayment strategies. An LIT will also review all available debt solutions, and if necessary, help you file a consumer proposal or bankruptcy.

Increase your savings, not your personal debt.

When you are hit with a large, unforeseen expense, you can lose control of your budget. A line of credit or credit cards can provide short-term relief, but credit is not a long-term solution. The best step you can take to avoid the next emergency when it arises is to be prepared. With a well-managed emergency fund, you can keep your focus where it needs to be, and weather the personal and financial storm.

Do you contribute regularly to an emergency fund? Join the conversation and find more resources and debt advice on Twitter and Facebook.

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