Weather the Storms with an Emergency Fund

Posted On 23 April 2020

Last updated on April 9th, 2024

With the global financial crisis looming as the economic shutdown related to COVID-19 continues, I won’t go into much detail about why everyone should have an emergency account.

I previously wrote about carrying emergency cash. That is not part of this emergency fund. The emergency fund I am talking about today is for the big crises that come our way. The recommended amount to have in the account is 3-6 months of expenses (or income).

According to GOBankingRates‘ December 2019 savings survey, 69 percent of Americans have less than $1,000 in savings, and 45 percent have nothing saved. Statistics Canada published a study in 2018 that the average Canadian has only $852 in net savings (per year). While this may not sound too bad, the top 20% saved $41,393 while the bottom 20% spent $27,935 more than their income!!

A Savings Account

For the money to be truly set aside, it needs to be in a separate savings account. Using an RRSP or 401K as an emergency fund is not advisable. It needs to be a savings account so that the money can be accessible when needed. You also don’t want to pay a lot to withdraw your funds.

Find an account that has a high interest rate. BMO, for example, has the Savings Builder account that pays 0.7% interest when you increase the account balance by at least $200 every month. So, why not treat saving like a bill? Set up an automatic transfer every month (or every time you get a paycheck).

Aim for a 1-Month Fund

It can take time to build a strong financial base. The most important thing is start saving. The second most important part is to keep saving.

The recommended amount to save is 10% of monthly income. If you need some help with finding additional money for the emergency fund, read Let Your Money Tell A Story.

We need to celebrate the small victories in our life. Achieving one month in savings is an accomplishment! Celebrate and continue saving.

Grow to a 3-Month Fund

Now, we need to focus on accumulating a month’s worth of money in your emergency fund. To build your account faster, add any irregular or unplanned money to your savings account. For example, a tax return is a great way to build your account faster. Since you’ve been living without that money, why not put it to good use?

Upon reaching the 3-month amount, saving should be a habit for us. We have become accustomed to living without that money since our spending has been adjusted so we can meet our current priorities.

Become a Member of the 6-Month Club

According to the statistics, most people never achieve this level of savings. The prize for achieving this is peace of mind and confidence! It is a great feeling that even if unemployment comes your way, there is enough in the emergency account to cover six months – even if you don’t receive unemployment from the government.

I encourage you to continue your saving habit – even after becoming a member of the 6-month club. That money will be needed sometime down the road – appliances don’t last forever, cars wear out, and insurance deductibles are needed.

Build Up the Account (Again)

When the hurricanes of life come our way and we need to use cash from our emergency fund, we can be grateful for that money. Once we get past the emergency in our lives, we need to start saving again and build our account back up. Do not be fearful to use the funds in this account – just don’t use them unless you must use them.

There will be more storms that come our way! The best thing we can do is to be prepared for them by having an emergency fund.