What is an Emergency Savings Fund (ESF)?
An Emergency Savings Fund is money that you set aside each month for many reasons such as
- Loss of Job
- Death
- Injury
- Unexpected expenses ie: Furnace- A/C- Vehicle-Roof
- Disaster of sorts
- Peace of mind
- A bucket of change in your closet or money under your mattress-This is only good for rainy day spare coin to save you from gong to the ATM.
- Line of Credit, HELOC (home equity line of credit)- some people use this as their emergency fund however I would suggest this as a last resort. Save for your emergency fund in a special place.
- Family and Friends- Thinking you can run to your family each time there is a crisis may be draining on friends and family.
- Pay Day Loans- Please, Please don’t get caught in this revolving door. Pay Day Loans are simply loans that cost you a fortune until your next pay-day. That still means you are short to pay the next bill and the next…….
I can remember from a young age that I would always keep a buffer in my Savings Account. I was terrified to see that I had no money in my bank statement book. I’m not sure why that terror took me on at such a young age but it’s never left. I don’t even think the term “Emergency Savings Fund” was coined back then.
Where to put Emergency Savings Money?
There was always something tearing away inside of me about keeping my account above $3000 at all times. If I dipped below that mark I knew I had to push harder to save more.
Today most people simply keep their emergency savings in a separate high interest savings account or in a TFSA. Some like to invest their Emergency Savings but if risk doesn’t sit well with you perhaps going the simple route is best.
Keep in mind in the above scenario I was young, living at home, no vehicle, rent or groceries to pay for. So what was the big deal? Why was I so worried about that savings account? Somehow I developed a need to think into the future and I still do this today. Is it a bad thing? I don’t necessarily think so but I try to balance my forward thinking with the present.
I believe forward thinking and planning for the future to be imperative when financial planning. I know what I did as a child with no known budgeting or money management skills is now on every financial guru’s budgeting list.
If one continues to only think about today it could be eye-opening if you are not ready for something that could happen tomorrow. What if we didn’t have credit cards, lines of credits/loans and leases. Do you think everyone would pay cash and live happily ever after. I doubt it. People would continue to spend as if nothing else mattered.
What does an Emergency Fund mean to you? This is what it means to me:
It means a feeling of waking up in the morning and knowing that if something were to happen today we’d be fine financially. We would not crumble with despair. If you’ve never experienced this feeling it is the best feeling in the world after LOVE.
Money matters can cause stress related Illnesses so preparing for an emergency might help ease some stress.
How hard is it to Save for an Emergency Savings Fund?
Saving for an emergency fund can be as little as $10 a month or as we like to do,budget it right in, similar to paying ourselves first. We budget around 15% of our net towards our emergency fund. It doesn’t always work out each month but for the most part as long as we stick to the budget the ESF is golden!
We like to keep at least 6 months to a year of expenses in our Emergency Savings Fund. Some people like to keep 3-4 months it really depends on what makes you sleep better at night.
I don’t have or make enough money to save?
If you tell me you don’t have $5.00 a month for an Emergency Savings Fund then I will tell you that you don’t need the pop, chips, video games, pizza, cable, cell phone etc. You need the Emergency Savings Fund. You should prioritize your needs vs wants. You should check your budget and see where you can make changes.
So many times I hear my mates tell me they are skint (broke) yet they are texting me on their IPHONE and driving a Mercedes.
I realize not everyone has spare money in the budget but all I’m asking is for you do whatever you can to save.
Some Ideas on how to make changes?
Learn about making your own laundry soap and save $5 a month.
Use Vinegar to clean up your budget instead of purchasing costly cleaning supplies
Use coupons to save at the cash- If you can save just $5 a month you can put that into your fund. Check out Savebiglivebetter.com or Kaleydavies.com for some great tips on couponing!
Buy Clothes at the second-hand shop- You can find so many great deals at second-hand shops. Save the difference in your ESF!
I hope I have inspired you to save a buck or ten and wake up feeling great in the morning knowing everything will be ok. If not revisit the childhood story of The Little Engine that Could. Never give up trying!
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Have learned first hand how important having an emergency savings which we DID NOT…starting the New Year off right … tracked all our finances in January, spoke with a credit counsellor (nonprofit) and getting our debt paid off , budgeting, living more frugal, and trying to increase our incomes …. Have emerg saving, yearly savings and house saving, would like to add retirement and education as well but maybe start that within the next 6 months …. LOVING CBB for all your hints, tips and such
Karen, it’s all about educating yourself and putting a plan in place. The budget was the most important thing we ever did and continue to do for our finances. I hope you find plenty of valuable information here to help you on your journey to debt freedom.
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I had an emergency fund and it stood me in good stead but, because of a long illness, ended up using both my emergency fund and my line of credit. We’re slowly clawing our way back now, both paying down are debt and building a little nest egg. It takes a long time. A word of caution for your readers: If you’ve fallen into debt as a result of an emergency don’t neglect rebuilding your savings while paying down the debt. We learned the hard way that you can’t necessarily rely upon building leeway within your LOC or credit card as you pay it down. If you’ve damaged your credit rating as a result of an emergency your lenders may well reduce your credit limit as you pay down your debt. You’ll end up owing less but shouldn’t count on being able to borrow it back again.
Great advice Beth thanks for sharing this with the readers as it’s always good to get tips from those that understand. I’m happy to hear you are both on your way to where you want to be. Mr.CBB
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Thanks for the great article CBB!!
I love how you remind people how simple it really can be to save a bit here and there! Since we had our little one last year I have done most of our clothing shopping at Value Village, and its saved us a bundle!
The trick that most people miss is to put that extra $$ you saved away instead of just getting MORE with it!
Love this:)
It’s funny how taboo talking about Value Village is in Ontario. I notice people say ew they won’t shop there and it really makes me laugh. We have saved alot of money and those very people would compliment the wife on her clothes… go figure! Cheers Save Big, Live Better! Mr.CBB
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I love this Mr.CBB. As you already know, we started our budget last fall. Now where we put/how we put our money away might make you laugh……but I feel I have to tell you.
We have 4 bank accounts. the first is our everyday account where our pays go into, and we divvy up the money from there. the second is our HISA where so much money gets automatically gets deposited every week. I guess you can call this our emergency fund account. The 3rd is just for writing cheques (so I never have to worry about an uh-oh moment) and the 4th is our U.S. account. I travel to the states approx. 4 times a year, so my hubby actually suggested this one.
We also have a huge “beer bottle” piggy bank where all of our change goes into, & Since saving for Vegas, my earnings from my 2nd job get put in our safe on payday. Which is how/why we were able to pay for Vegas in cash!!!
This may seem extreme, but we needed something extreme to get us on track. Whenever my hubby asks how much money we have….I only need to look at our everyday account. Everythign is is pretty much out of sight, out of mind.
Hi Stacey,
Thanks for sharing that with us and I don’t find it odd. We have many accounts as well
1-chequing acct
2-High Interest Savings account
3-Savings Acct
4- Uk account
We manage our money best this way and we know what comes out of each account. Our Chequing is where everything ends up coming out of. I transfer money through the accounts. The savings account is where we keep our projected expense money. When a bill comes in I transfer the money to the chequing account. I hated having x amount in savings only to realize we didn’t because we didn’t budget for projected expenses. Now it’s perfect, so no I don’t find it odd.
I think it’s great you are saving your coins up for a trip. It’s best to plan then go into debt for it. When it is out of sight and out of mind it;s best, that’s why we should get rid of our credit cards or only have one… same concept. Mr.CBB
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Agreed but then it is the duty of the people who know how to invest ( you can do that even with $2 ) to let the others know about it and spread the word. If we are able to spread our knowledge automatically people will develop an interest in investing.
Keep up the good work
Thanks for the inspiration shailvani, I’m learning everyday from people just like you. Spreading knowledge is something I plan on doing for a long time as long as I continue to grow. Cheers
Hey very interesting
It is true that people need to save and live with in their means. They need to keep some money aside for a rainy day or a rainy month or even a year, but there is one fundamental problem with this saving method
Say you save a $100 a month for 12 months. This means you have saved $1200 a year, you earn an interest of say 3% on it but the average value of inflation is 5% so what is actually happening is that at the end of the year your money loses 2% of its value. Inflation is the increase in cost of living. So something that cost you $100 today will cost you $105 next year due to inflation(this is assuming the best case scenario), so what has ended up happening is that you lose $24 a year.(ideal case). What i would suggest is that instead of just saving at least try and beat inflation, get educated in investing it will pay off later.
Hi, thanks for your comment. I agree with you about inflation and money won’t be worth as much as it was a year ago etc. I say if you have the funds to put more away and beat inflation then by all means jump on the wagon. Most average earning individuals/families I speak to in an around Canada say that they are even lucky to put any money aside. Most struggle to make ends meet and want help setting up a budget.
So trying to beat the game for most is not even in the charts at the moment. Educating oneself even on the basics of investing is worth its time in $, I agree with you. I would like to do my own investing hence why I am educating myself.
I say do what you can and if you can save more, then save more. I hope one day we can all look back and say we made the right decisions but until then we all rely on the majestic crystal ball and our own gut instinct.
Cheers Mate!
I agree with the 3-6 months for the emergency savings, and I do keep mine in a TFSA. If there is excess, it goes to the RSP. I would never dream of using credit for the fund unless it was a dire situation. Payday loans…. the never never plan. Never have enough due to fees and never get out of the circle due to fees….. however, that is also a situation many find themselves in with revolving credit, the never never plan. I see this almost every day in my work and since I have crawled up from absolutely nothing 2 years ago (due to a marrige breakdown) I have personal experience to draw on and really try and make points to them that you do NOT have to be on these plans of going nowhere, I did it and so can you!
I couldnt sleep at night without knowing that I have my bills paid and a bit in the bank for both the unexpected and retirement as well as just a few dollars for ME in case I want to just treat myself.
It took me 2 years but from no income, no job, no future to employed, savings and comfortable living. (and I havent even touched on the staggaring amount of debt I took on so he could just walk away free and clear from the marriage!)
Thanks for your comment. The hard part is to BELIEVE. You have to believe that you can get out from living pay cheque to pay cheque with no savings. I think it’s great you educate people with your experience just as i like to do. You sound like you been to the bottom and back up and many people will be able to associate with you and will listen. Don’t ever stop helping others, we need to educate our Canadians rather than keep opening these silly pay day loan shops. Cheers!
It frustrates me to no end when people say they’re broke but don’t want to admit that they are living beyond their means. Believe me, we’d love to have a house with some land but we’d rather be able to grow our bank account at this point in our lives. Our friends all live in large houses, have multiple cars and take lavish vacations but they are also virtually on a first name basis with their creditors. I like our way better!
I agree 100%. I would rather have no debt and live with-in our means that have to impress my mate or coworkers. Who cares really! We don’t. Thanks for your comment.
I agree, an emergency fund is essential. 3-6 months seems appropriate.
A “high interest savings” is a relative misnomer, with the present market, however, I keep some “cash” in BTB trust. It earns about 1%. Can be extracted in a day or so & be bought online with a brokerage account. It is covered by CDIC. At least it gets you some return, while it sits there!!!
Thanks for your post. I remember back a few years when I was getting 3% interest in my High Interest Savings Account and thought that was low. Now I would love to have that 3% back. currently I get a whopping 2% but I guess it’s better than nothing.
Although the high Interest Savings Account may not be ideal for savvy investors for the average person it’s a simple place to keep Emergency Savings.
Cheers Mate!
You say many people keep their savings in a “high interest savings account”. Where do you find one of those these days?
I would not keep an emergency fund if I also had credit card debt. I would use that money to pay down the credit card knowing that I am creating available credit incase of an emergency (which may come in a year, two years, or not at all).
No point having $3k sitting in an emergency fund while you pay 18% interest on a $3k credit card balance.
Good article! Keep them coming.
“High Interest” I suppose is just a name we’ve all come to believe sounds good but it’s better than nothing. If I had credit card debt I would be more than anxious to pay it off especially at high interest. At the same time I would still try and balance that with putting money aside for an Emergency Savings Fund. That’s just the way I roll but you like to pay off all the debt and that’s ok to. Whatever makes someone happy is what’s important.
Thanks for your comments Mate! Mr.CBB!