When it rains it pours — that's why emergency funds are critical
We moved into our new home on Feb. 27, 2019, the day that Toronto had one of its worst blizzards in decades. The process was long, arduous, and amplified our costs by an additional $450 because we paid for the movers by the hour, and the hours dragged on and on due to the snowfall.
About 24 hours later, our car didn’t start due to an unexpected corroded cable in our engine (repairs added up to $350), and we found out the electrical fixtures in our spare room and the main hanging light fixture in our dining room were non-functional due to old wiring (electrician’s fees totalled $500). We dipped into our emergency funds to cover these costs.
Also known as rainy day money, this kind of fund is for the unexpected expenses that creep up from time to time. These include job loss, medical bills that fall outside of insurance, a sewage line that backs up in your house, a death in the family that requires travel, or an unplanned parental leave, among other things.
How much do you need?
To ensure you’re well prepared to cover the costs of an emergency, financial experts recommend having at least three months worth of your living costs set aside. To calculate this, simply add up the essential items in your budget every month — food, clothing, shelter, telecommunications, and transportation. Non-essentials like personal trainers and restaurant spending should be excluded. So, if your household takes $4,000 per month to maintain essentials, then your emergency fund should be $12,000.
I get it, that’s a lot of money. But don’t let the size of the fund scare you. In my experience, it takes about three to four years to build up this fund.
Automate your emergency fund: Start your saving by setting up a high-interest savings account that doesn’t have any fees, and that you can’t tap into with your debit card. Next, set up regular automatic contributions into the account every payday. Start with $100 bi-weekly, and then increase it by $50 every three months. When you come across excess money from your tax return or a freelance gig, shove that money into your emergency account, too. Last, and this happens automatically, allow the money to build interest. Once you’ve reached your goal, you can stop.
To find this excess cash monthly, look at your spending. If you’re currently spending $200 each month on booze, for example, cut it by half. If you get your nails done, DIY them. If you’re used to buying groceries from a speciality store, switch to a discount grocer.
As you build your fund, you’ll probably experience a few emergencies, forcing you to dip into it like I did last week. But once you’re through that rough patch, commit to replenishing your emergency fund.
Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star. Follow her on Twitter: @lesleyscorgie