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Even if you’re careful with your money, and good at saving, you’re not immune to the unexpected. That’s where an emergency fund comes in handy.
Here are five tips for building an emergency fund for some well-deserved peace of mind:
1. Create a budget
When your income goes up, your first impulse may be to start spending on yourself. But it’s the perfect time to review your budget.
You don’t need to go to extremes. But you may need to:
- take stock of your situation,
- fix any money leaks, and
- know when you can afford a little treat.
Make sure to set realistic and achievable short-term targets. You can always aim higher later.
You can use an online budget calculator to help.
2. Keep an eye on your debt
Give it some thought before you agree to a credit limit increase from your financial institution. Ideally, your limit should be no higher than your net monthly salary.
When paying your credit card balances, the high-interest ones should get priority. If you’re paying off several balances, a consolidation loan might be best. It can help you manage your debts by rolling them into one monthly payment.
3. Get serious about saving money
It’s best to start building your emergency fund when your finances are on track.
Decide how much you want to save and what is a reasonable goal. Experts recommend that you tuck away about three months of your net income. Your net income is the amount your employer deposits into your bank account (after taxes and deductions). If you lose your job, your emergency fund can help cover your expenses until you get back on your feet.
An easy way to help build your fund is to set up an automatic deposit. Setting aside 10% of your net income means you’ll reach your goal in roughly two and a half years.
4. Make sound investments
A chequing account may not be an ideal place to keep your emergency fund. To help build your safety net, consider a tax-free savings account (TFSA). Why? Because all your investment earnings and income remain tax free.
Here’s how it works. With a TFSA, you can grow your money with various investments. TFSA contributions aren’t tax deductible. You’ve already paid income tax on the money you put in. So, you won’t pay tax when you take it out. And, all the interest you earn on your investments is tax free.
You can withdraw funds from your TFSA for any reason, whenever you need it. However, it may take a few days to withdraw your money. This can help protect you from making impulse purchases.
5. Talk to an advisor for help
By looking at your situation, an advisor can help you create a plan that:
- saves you money,
- makes the most of your saving opportunities, and
- balances your short and long-term goals.
For example, an advisor may discover you can get a tax refund by investing in your registered retirement savings plan (RRSP). You could then deposit that refund into your TFSA.”
Maybe you’re thinking about buying your first house. Or considering going back to school. Instead of dipping into your savings, you could consider borrowing from your RRSP to pay for these goals. Whatever the case, an advisor can help you examine your current situation and goals to make an effective plan.
Read or watch more:
- What is a TFSA? (video)
- RRSP or TFSA? How to choose between the two
- How to build your emergency fund
This article is intended for general information purposes only. It's not meant to provide specific financial, tax, insurance, investment, legal or accounting advice. Please make sure you seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.