How An Emergency Fund Can Rescue You From DebtApr 25, 2019
They say if you want to see a rainbow, you have to put up with the rain. But unplanned events can quickly turn into a perfect financial storm, and you could find you need help with your debt.
Life hands out all sorts of financial emergencies, and if you have a mortgage and associated expenses to cover each month that may already be stretching your budget, anything extra can throw you into financial distress.
Suddenly, despite your best efforts, you can’t pay your bills, and you find yourself in debt.
An emergency fund can help you cover the costs of a financial or personal emergency without the need to rely on credit.
Nobody can predict when disaster will strike, so it’s important to have a budget that includes regular contributions to your emergency fund. Emergency funds are different from other savings, and should be kept in a separate account for true emergencies only.
What is a real emergency? This is an important question, because it plays on our emotions and our understanding of our needs vs. our wants. There are countless situations where an emergency fund can be a real life saver. Here are some of the major ones:
Repairs and replacements
Vehicles, smart phones, computers and other major household appliances may constitute emergencies, especially if you depend on them for work. Other home emergencies include a burst pipe or replacing a roof. These can cause major damage to the home, as well as your personal belongings.
Change in working status
Any sudden change in employment for you or a partner could quickly disrupt your budget and contribute to debt. Job instability is a growing concern for Canadians, especially millennials, who worry about finding and keeping good jobs.
These are particularly stressful events, and may also require time away from work to help provide care, arrange medical appointments and more. The combination of job loss and medical expenses can have an immediate, devastating impact on your debt load.
We don’t like to think about the possibility of natural disasters, but recent events like the flood in Calgary or forest fires in Fort McMurray highlight the need to have an emergency fund in the event of an evacuation or natural disaster.
Lance Cothern at Money Manifesto shares the story of a natural disaster and how an emergency fund can mean the difference between life and death.
How much do I need in my emergency fund?
Typically, the rule of thumb is to save enough to cover all your expenses for three to six months. Depending on your living expenses (mortgage, insurance, utilities, vehicle payments, groceries, subscriptions, etc.), that could be a lot.
That’s why it’s important to start saving now, and to keep contributing until you reach your goal. If you take money out of your emergency fund, be sure to start contributing again so that your fund is flush.
A budget and a good understanding of your monthly expenses will help you determine the size of your emergency fund. Then, make sure your budget includes a monthly contribution to your emergency fund. What happens if you don’t have an emergency fund? You’ll likely end up charging expenses to a credit card or line of credit.
The Financial Consumer Agency of Canada provides some great resources to help you prepare a budget.
When you need help with debt
Without an emergency fund to rely on, a large unexpected expense or an ongoing emergent situation (like job or home loss, or medical issues) could exceed your limit on a credit card or line of credit. And the debt and interest accumulated if you don’t have savings to support yourself could force you to seek a formal debt relief solution.
Talk to a Licensed Insolvency Trustee (LIT) to explore your options if you have overwhelming debt. An LIT will help you understand your rights and responsibilities explain how the different debt solutions could affect your home and other belongings.
If you don’t have savings set aside for an emergency, you’re not alone. Many Canadian homeowners don’t. The best help you can give yourself is to prepare for the unexpected by contributing to your emergency fund, so that you and your home will be secure if any problems arise.
Have you struggled with debt during an emergency situation? Start a conversation online. #LeaveDebtBehind #HousePoor #Millennials