Why You Need an Emergency Fund and How to Start

There is peace in knowing that you have a financial cushion. Having funds set aside for emergencies gives you peace of mind and is the basis for financial well-being. Of course, it’s easy to see the perks of having extra cash socked away for emergencies, but it’s a bit harder to figure out how to start your own emergency fund. This is especially true if you end every month with little or no extra cash in your budget.

Two Types of Emergency Funds

There are two different types of emergency funds. The first is a relatively small dollar amount you have saved in an easily accessible location for immediate access. Financial experts suggest Canadians should have $1,000 or perhaps $2,000 in an account for any situation where you need immediate access to cash or check.

The other type of emergency fund is designed for a long-term emergency. This fund should have 3-6 months of your total spending stashed away in case you wind up unemployed or unable to work for any reason. You don’t need to have immediate access to these funds, so putting them in a savings account where you don’t see the money every day might be a great way to let your emergency fund build.

Trying to go from no savings to six months of savings is an intimidating goal. Start with the smaller savings account – the funds you’d need if your car broke down or if an unexpected medical bill arrived. Then, once you’ve established good savings habits, you can start building your long-term emergency savings goal.

Building an Emergency Fund

There are two ways to save money. The first is to spend less every month and save the extra. The second way is to earn more money and save that new income. With those ideas in mind, here are some suggestions of ways to start saving for your emergency fund.

Get a part-time job.

If you have extra time in your schedule – and if you’re watching television or playing games for hours every night after works, you have extra time – consider getting a part-time job.

There are many part-time gigs that work well with full-time work schedules and can bring in hundreds of extra dollars every month. Consider delivering pizza or other types of food delivery. Pick up groceries for people or sling some coffee on the weekends.

Working just 10 hours per week might net you $100 to $200 per week, depending on how much you’re paid and tips, of course. You can have your first $1,000 tucked away in your emergency fund in less than six weeks.

Live below your means.

We often hear tips about saving money that involve skipping a few coffee drinks or selling some unused items from your home. Those are excellent bits of advice, but unless you drink a lot of coffee every month, you’re not going to see terrific savings piled up at the end of the month.

Instead, focus on making big changes to your budget so that you can live below your means and have quite a bit more cash in your budget you can divert to savings. This might mean moving into a smaller apartment. Or selling a car with expensive monthly payments for a car that costs a fraction of the price but can still get you where you need to go.

Cut the cable and save hundreds per month – just don’t buy so many streaming channels you wind up with no savings. Cut the small things in your budget but go first for the biggest expenses and reduce those as much as possible. Less is more, especially when you can now save hundreds of dollars every month and improve breathing room in your own budget.

Store your money out of sight.

One of the hardest parts of saving money is actually saving it. Creating room in your budget for saving means you’ll have what feels like “extra” money every month. If you’ve developed a habit of spending all the money that you have in your account every month, you need to set up a strategy where you’re not going to be tempted to spend your newfound savings.

That means stashing your cash in a spot outside of where you normally access your money. If you have to look at that “extra” money every month, you may feel yourself tempted to spend it on things that are a bit less “emergency” than you originally intended.

Consider setting up a savings account with a different bank – one that you won’t be looking at every time you use your debit card. If you’re not looking at your cash, it will be easier to let it grow.

Save first, then spend.

Once you have a new spot to save your money, you’ll need to set up a practice of saving first before spending. A budgeting plan that says you’ll just save whatever is left at the end of the month isn’t a workable plan. You’ve probably already noticed that there isn’t much left at the end of every month.

Instead, set up a system where you automatically transfer your savings out of your paycheck into your less-monitored account. Then you won’t ever see the money you’re trying to save, and you have the freedom of access to every dollar that remains in your primary account for bills and other expenses.

The good news about saving is that its habit forming. It can be a challenge to get started with your new savings plan, but once you have a method of saving in place, you’ll find it easier and easier to say no to unnecessary purchases and save more money.

It’s fun to pull up your account summary for your savings from time to time to check in. Not only will you enjoy the feeling of having large sums of money at your fingertips, but you’ll have the confidence that comes with knowing you have a plan – and the funds – in place for financial emergencies that come your way.