We can all agree that it’s good that 2020 is finally over. It was a year of unprecedented volatility across all areas of life. And it shone a painful light on how carrying too much debt and too little savings can make everything even more difficult. The good news is that things are starting to look up for 2021. We can take what we learned last year and make better financial choices this year. One positive step forward is setting up an emergency savings plan that will provide you with peace of mind when you may need it most.
Can’t I use my credit?
Generally, credit is designed for temporary expenses that you’ll be able to pay off within a month or two. It’s not ideal for sustained periods, like those times when you’re trying to make ends meet between projects. Keep in mind that most credit cards charge 19.5% interest on cash advances, meaning that you’ll have to repay the amount you borrowed plus the additional applicable interest rate. If you experience regular income peaks and valleys, it also means that it will take you longer to pay back the loan.
How do I start an emergency fund?
Financial experts suggest that a solid emergency fund is the equivalent of three months-worth of living expenses. To get started, open a new account like a TFSA that is available through CEIRP and then try saving the equivalent of one month’s worth of groceries. The following month, you might try saving the equivalent amount of one of your other expenses, like your phone or electrical bill. To keep up your momentum, aim to save 1 to 10 per cent of your income with each pay cheque. Keep in mind that it’s more important that you’re starting a savings habit than the total amount that you’re saving each month. To help make your program automatic, consider creating a regular funds transfer. Be sure to only make withdrawals from your emergency fund when you have an actual emergency. A couch on sale that you simply can’t live without doesn’t count.
If you need additional planning support, visit the Rags to Reasonable website, in particular the Do-It-Yourself worksheets page.