Top Planning Tips To Avoid A Financial Emergency

Most people will have to deal with a financial emergency resulting from an unexpected expense or a drop in income at some point in their lifetime. Illness, injury, layoff, home and car repairs, or vet bills can strike any time. Planning an emergency fund can help ensure these unexpected events don’t put you into debt.

Our Licensed Insolvency Trustee always recommends setting up an emergency fund to deal with life’s financial curveballs when providing debt counselling services to our clients. Whether you are already in debt or want to avoid falling into debt, here is what you need to know about emergency funds.

WHAT IS AN EMERGENCY FUND?

An emergency fund is funded you set aside to pay for unexpected expenses.

Think of it as a financial safety net that will cover you in the event of an emergency you did not budget for (e.g., emergency home repairs, major dental work like a root canal, or large veterinarian bills). It also gives you time to adjust your budget if the unexpected happens (e.g., health problems, injury, or job loss).

These financial emergencies can be devastating if you’re living paycheck to paycheck with no savings.

HOW CAN PLANNING AN EMERGENCY FUND SAVE ME FROM DEBT AND BANKRUPTCY?

Planning an emergency fund helps cover unexpected expenses, so you don’t have to go into debt when things come up.

If you do not have an emergency fund and the unexpected happens, you must pull money from your other savings or investments to cover the costs. Then, this puts you behind your financial goals.

If you do not have additional savings or investments, you’ll 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, so you save at least six months’ worth of your regular expenses OR six months’ value of your income.

(Speaking of dependents, now is a great time to start teaching your children financial basics, including planning an emergency fund. Learn more about the critical financial concepts they need to learn in this post)

At first glance, 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 get your emergency fund set up.

HOW TO START PLANNING AN EMERGENCY FUND

Here are our Licensed Insolvency Trustee’s tips for planning an emergency fund:

Set an attainable goal. It may seem unachievable to save three to six months’ worth of salary or expenses. If it feels possible, set a lower goal such as $500 or $1,000 and once you achieve it, up to your target and keep going.
Open a separate bank account for your emergency fund. Doing so will help you keep track of the balance and prevent accidental spending of the funds.
Small amounts add up. Every little bit counts. You will be surprised how quickly the emergency fund adds up if you set aside small amounts whenever you can. For example:
When you open a separate account for your emergency fund, ask your bank to automatically deposit $10 or $15 from each paycheck into the account.
Limit any unnecessary expenses, such as buying lunch every day. Bring your lunch to work and put the money you save into your emergency fund.
Consolidate and pay down your existing debt. Combining multiple debts or “consolidating” them will make it possible only to have one monthly payment that fits within your budget. When you consolidate and begin to pay down your debt, the interest you save can then build your emergency fund.

(This post covers some big signs you might be overspending and what you can do about them)

MORE QUESTIONS? GET DEBT COUNSELLING FROM A LICENCED INSOLVENCY TRUSTEE

If you have more questions about emergency funds and how they can keep you from financial trouble, the compassionate, qualified debt counsellors at Fox-Miles & Associates Inc LIT are here to provide helpful financial advice and debt counselling. We have offices in Edmonton and service clients in the surrounding areas, including Sherwood Park, Fort Saskatchewan, St. Albert, Spruce Grove, Stony Plain, Leduc, Hinton and Edson.

(Learn more about why you can trust licensed insolvency trustees in this post)

Your first consultation is free, so you have nothing to lose (except the feeling of being afraid of debt). Call our offices today at 780-444-3939 to schedule your free consultation.

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This post was first published in 2020, but it was updated in 2021 just for you.