How Can an Emergency Fund Save Me From Debt & Bankruptcy?
An emergency fund will cover unexpected expenses, so you do not have to go into debt. If you do not have an emergency fund and the unexpected happens, you will need to pull money from your other savings or investments to cover the costs, putting you behind your financial goals. If you do not have additional savings or investments, you will be in an even riskier financial position when trying to cover an emergency expense. If you rely on a credit card, payday loan, line of credit, or cash advance, you may struggle to pay it back. High-interest rates can drive you further into debt. If the debt continues to grow, bankruptcy may be the only option.
HOW MUCH SHOULD I HAVE IN MY EMERGENCY FUND?
When providing debt counselling services at Fox-Miles & Associates Inc., our Licensed Insolvency Trustee works with clients to determine how much they need to save in their emergency fund based on their financial circumstances. Here are some general recommendations for how much you should have in your emergency fund:
- Aim to save at least three months’ worth of your regular expenses OR three months’ value of your income (either option is adequate to keep you out of debt in the case of an emergency).
- If you have dependents, you should aim to double the emergency fund to save at least six months’ worth of your regular expenses OR six months’ income value.
These amounts may seem out of reach, but if you have a reasonable budget and save gradually, a financial safety net is 100% achievable. Read on for a few simple tips from our Licensed Insolvency Trustee to set up your emergency fund.