Setting up your basic emergency fund

The emergency questions

When your car breaks down, what will you do? What will happen when your roof has a leak? Will you be laid off from work? What happens if your child becomes sick? Do you have the money to pay for each emergency? Will you have to borrow money from family and friends? Will you put the expenses on your credit card knowing you won’t be able to repay the balance when your statement arrives?

Answering these emergency questions is tough, you may not have an answer to these questions. Most people don’t have enough money in their bank accounts to pay for these things; they’ll have to beg and borrow and hopefully not steal. Try sleeping tonight knowing you don’t have a basic safety net for you and loved ones. Please try it, you won’t sleep well.

The first step

The first step to financial success is having an emergency fund. When life happens you’ll have the means to take care of it without getting into even more debt than you are already in. Having a safety net lets you sleep a whole lot easier; it provides security which is a nice warm feeling.

So how do you get started on building the emergency fund? Put $1,000 in a chequing account or somewhere out of site and safe in your home. The importance is that it is cash and you can get to it in case of an emergency. Having the money available to you at any time is essential so that you are able to pay for the necessary expense when it happens, you don’t want to have to wait a few days to get your $1,000 out to pay for an emergency. Life happens fast and you want to be ready.

It's time to sell

If you don’t have $1,000 it’s time to sell some stuff. Sell anything that is not needed like the extra car, toys, clothing, furniture if need be, there is no limit. Your $1,000 emergency fund is way more important than the sports car you drive around in the summer. At first it sounds crazy that selling something and living below the standard of luxury living is the way to go. Most people live above their means at a luxury level to keep up with the Jones. We all try to keep up with the Jones but remember the Jones are in debt way over their heads; they don’t own anything, the creditors do. So sell your stuff folks to get to your $1,000 emergency fund.

The emergency fund goal

If you have more than $1,000 to deposit into your emergency fund than by all means put more in. According to most experts you should have at least three to six months of savings however nine to twelve months would be more ideal. Three to six months passes by quicker than anyone will admit. Medical expenses and unemployment were cited in the annual BMO Rainy Day Survey as the largest emergency concerns Canadians had. These two concerns alone may quickly surpass the six month mark. In the survey 60% of respondents stated they had increased stress levels when emergency occurs. Not only is this a negative to your health but to that of your marriage and children! Debt snowballs out of our control and affects far more than your financial life.

Next step

The expectation at this point is to have that $1,000 emergency fund. With spending most likely over budget socking away one year worth of expenses may break the bank. Right now focus on having $1,000. When life happens and you use your emergency fund the next step is to replenish it immediately because life continues to happen.