The best way to avoid using credit during a financial emergency is to create an emergency savings fund. The experts recommend having no less than three to six months' worth of your regular net income set aside to get you through any short-term financial rough patch.
Saving six months - or even three months - of income is no easy feat when the average Vancouver resident owes almost $25,000 in non-mortgage debt and has significantly higher housing costs than most of the country. In fact, a recent survey by the Canadian Payroll Association found that more than a quarter of all B.C. workers (27%) say they would likely be unable to scrape up $2,000 for an emergency expense within the next month. Sound familiar? If so, read on.
When you already feel caught in a financial rut, the thought of saving extra money can seem like an unattainable goal. However, anyone can set aside emergency savings if they make the decision to do it, and break it down in to manageable steps.
Here are five simple steps you can take to build your own emergency savings plan.
Step 1: Set Your Goal
If you begin with the goal of saving three months of net income, figure out what that number is. For example, if you earn $3,000 per month, you will need to save $9,000 to in order to reach your goal.
Step 2: Determine Your Time-Frame
Pick a reasonable time-frame for achieving your goal, keeping in mind that it won't happen overnight, and probably not in 12 months either. For example, if you would like to reach your goal of saving $9,000 in 24 months, you will need to save $375 per month. If you need to take 36 months, you have to save $250 per month.
Step 3: Find the Money in Your Budget
Once you have figured out how much you need to save each month, look closely at your cash flow (a fancy way of saying budget) to determine where you will find the money. The first place to look is at non-essential spending, such as vacations, entertainment, dining out, and clothing and accessories. Next, have a look at how much you are spending on needs, such as food, transportation and housing. Just imagine if you could cut your expenses by 10%. If your typical monthly expenses are $3,000, you could save $300 per month.
Step 4: Put your Plan into Action
As soon as you have completed Steps 1-3, it's time to start saving. Open a separate savings account for your emergency savings and don't use the account for other purposes. Once you have opened your emergency savings bank account, next set up a regular, automatic transfer from your chequing account to your emergency savings account. If it's easier for you, consider spreading your monthly savings goal between your pay periods, whether they are weekly, bi-weekly or semi-monthly.
Step 5: Periodically Review and Adjust Your Goal as Necessary
To ensure you reach your goal, it is important to review your progress regularly and adjust as necessary. If you experience a change in cash flow, you may need to adjust your monthly savings amount, which might mean it will take longer to reach your goal. That's perfectly okay, but it's important that you never give up! Even if it takes 5 years or more to reach your goal, isn't that better than never reaching your goal because you stopped trying? Alternatively, you may find that you are able to reach your goal sooner than you planned, allowing you to work on other financial goals.
Having an appropriate emergency savings fund will help you weather most short-term financial storms and, more importantly, it will ensure that you don't need rely on credit or borrowed funds when the unexpected happens.
If you are already struggling with debt and it is eating up most of your cash flow after (or worse, before) you've covered basic living expenses, you should speak with a Licensed Insolvency Trustee who will recommend an appropriate debt solution. It may be necessary to address a debt problem prior to or while you build your emergency savings fund.