We often hear how important it is to have an emergency fund, but for many people, it is not always a top priority. But having a financial cushion to fall back on when something unexpected happens means you will not have to dip into your savings and sacrifice what is most important to you.
What do you do if something unexpected happens?
If the last year has taught us anything, it is that anyone can lose their income or become sick. If you are already in the habit of saving up for something special, doesn’t it make sense to also save for the proverbial rainy day, which is harder to predict? Having an emergency fund means being able to stay afloat in hard times.
You lose your income
If you work in a precarious sector, your work hours could vary, along with your income.
If you end up losing your job, you will have to wait 2 to 3 weeks to receive employment insurance benefits. Keep in mind that your benefits will be less than what you earned. The time it takes to find a new job can vary and depends on many factors.
Having some emergency savings cushions the blow and helps you cover everyday expenses until you get back on your feet.
You become ill
If you take a sick leave, your group insurance will usually only cover part of your salary. Having an emergency fund means you can continue to pay your bills while you focus on getting better.
Good to know
If you become ill or lose your job, remember to contact your insurer to make sure you have adequate coverage. Some expenses might be covered by your individual insurance (like disability and loan insurance).
How much should you save?
Ideally, your emergency fund should be enough to cover 3 to 6 months of living expenses, such as rent or mortgage, groceries, phone and Internet, financial obligations and so on. If you spend about $2,000 a month, you will need between $6,000 and $12,000 in savings.
To determine how much to save, ask yourself how much you would need if you did not have any money coming in. You should also consider your situation and lifestyle and how much financial flexibility you have.
How to keep your goals on track
If you fall on hard times and do not have emergency savings, your first instinct will probably be to use credit, which can become very expensive. If you want to avoid that, you will have to dip into other savings, like the money you set aside to buy a home, cottage, trip or maybe renovations.
It is never too late to gradually build up a financial cushion without having to give up your dreams.