Few experiences are as stressful as looking at a pile of bills when you don’t have enough cash on hand to cover them. Without an emergency fund, that stack of bills can quickly turn into a cycle of debt that feels impossible to escape.
Building an emergency fund is a crucial step toward managing unforeseen expenses and achieving financial stability and greater peace of mind. This guide provides insights to help you manage your finances, build a safety net, and work toward greater financial security.
Assess Your Financial Health
Before beginning your journey to financial freedom, it's important to see the bigger picture. To really get a grasp on your finances, assess your overall financial health. This way, you can figure out where you stand, what to prioritize, and how much you should save.
Start by looking at your current debts and expenses. Consider where your money is going each day, week, and month. Don’t forget to include all your outstanding debts—especially any old debts that could be hurting your credit score.
Credit reports can help you understand your debt situation better. Canada has two credit bureaus: Equifax and TransUnion. You can easily request a free copy of your report from each of them. Since not all companies report to the same bureau, checking both gives you a more complete picture of your credit.
Meanwhile, your expenses are those monthly bills you always pay, like rent, mortgage, or car payments. Even if you're great at paying them on time, it's important to include them in your overall financial plan because they impact your budget alongside your debt.
Set Your Savings Goals
Next, take a look at your income and monthly budget and determine how much money you have available each month. Be sure to include all sources of income: full-time, part-time, and side gigs.
Tracking all your incoming money helps you see the bigger picture of what you have to work with, even if some income varies each month. Once you know your total income, compare it to your expenses to create a monthly budget. Your budget should be “for you” rather than “against you”; it should not only cover your expenses but also fit your lifestyle and support your goals.
After creating your budget, determine how much to save for emergencies. For many people, saving 3–6 months' worth of living expenses would suffice; but some might have specific needs that require different amounts, such as:
- gig workers with inconsistent income
- self-employed workers with unpredictable expenses
- those living with disabilities
- those facing job loss or other uncertainties
Some individuals may prefer to save more, such as 6–12 months of living expenses, to better manage unexpected financial challenges.
Set Up a Budget That Works
Now that you've looked at your financial situation, it's time to make your monthly budget. Your budget doesn't have to be complicated — so long as it reflects your actual income, expenses, and lifestyle.
Today, you can find a variety of free and paid apps to help you create a budget. Even so, creating a practical budget doesn't require fancy tools. If you prefer spreadsheets, use those instead; simple pen and paper can also do the job. The key is choosing a budgeting method that suits you and sticking to it consistently.
Your budget should include all your monthly expenses and help you track your spending habits. This approach allows you to identify areas where you can cut back — such as unused subscriptions, memberships, dining, entertainment, or other non-essential expenses.
Begin Building Your Emergency Fund
Building an emergency fund can be easy when you have a sustainable approach. For example, automatic deposits ensure you save a set amount or percentage from each payment or paycheque. It's an easy way to begin saving for an emergency or for future plans.
Here's how it works: many people have their paycheques or payments automatically deposited into their chequing accounts. You can split this transaction by designating a portion for savings and the rest for chequing. It's an easy way to "pay yourself first," as financial experts often say.
For example, you can allocate 80% of your paycheque to your chequing account to fund the budget you set up. This ensures you have enough money to cover bills and personal expenses. The remaining 20% can be set aside in your savings account to help build your emergency fund.
Set short- and long-term savings goals to work toward. Reaching the short-term goals will help boost your confidence and keep the momentum going as you work toward your long-term goal.
Adopt An Effective Debt-Reduction Strategy
Saving for emergencies now is essential to protect yourself during a future financial crisis. However, managing outstanding debt is also an important part of financial planning. What's more, eliminating debt may allow you to allocate more money to your emergency fund, your personal budget, or both.
Before you can begin tackling that debt, you need to prioritize and plan. Three proven methods are the snowball method, the avalanche method, and debt consolidation.
Snowball Method
The snowball method is a debt reduction strategy that involves paying off your smallest debts first to build momentum and confidence. By focusing on these smaller balances, you achieve quick wins, which can help your finances and motivate you to tackle larger debts.
Start by listing your debts from smallest to greatest. Then, pay off the debts in that order — reducing your recurring payments faster, and allowing you to achieve small wins as you build financial momentum towards your larger financial goals.
Avalanche Method
The avalanche method uses an interest-forward approach. It involves paying off debts with the highest interest rates first; this way, you minimize the amount of interest you pay over time. It can save more money than the snowball method in the long run, but it may not provide immediate savings in the near term.
Debt Consolidation
If you're unsure about your options, you might consider exploring debt consolidation. This option combines some or all your debt into one payment, simplifying your finances and potentially reducing the total cost of your recurring payments. You can use this method as part of either the snowball or avalanche method as well.
In the end, it's up to you to choose the method that works best for you. If you've considered these options and you're still having trouble with your debt, you might explore the possibility of talking to a financial advisor. This professional can help you understand your options and create a plan that suits your needs.
The Key to Financial Freedom is Consistency
Financial freedom is achievable with a good plan, regular effort, and a focus on both saving and paying off debt. You may have to revisit your plan as your financial circumstances change. Make adjustments to your strategy as needed to get the best results.
Remember, your emergency fund is essential. You can't successfully plan your financial future without financial security during uncertain times or unexpected expenses: from simple home or car repairs, to job loss, to major illnesses or injuries.
Through simple steps and consistent effort, you can avoid that stressful stack of bills. You can achieve peace of mind knowing you're covered when the next financial crisis occurs as well.
The information in this article is general and for informational purposes only. It should not be considered financial or investment advice. Please consult a qualified financial advisor or tax professional to determine how the FHSA might fit into your financial plans.