What is an Emergency Fund and How to Build One?

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An emergency fund is a cash reserve that is set aside for the sole purpose of providing a financial bridge in case of emergency.  

What You Need to Know

Traditional advice says that you should have at least 3 to 6 months’ worth of expenses set aside in case of emergency.   An emergency fund should be totally separate from an everyday savings account.  The fund should provide you with funds to use so that you do not have to tap into retirement savings, credit cards, or other expensive loans. 

  • Predetermine what will constitute an emergency

It’s always tempting to dip into savings for unnecessary expenses.  Therefore, it can be a good idea to have some rules for your emergency fund.  For example, an emergency fund could replace income in the event you lost your job, major repairs for your house, or major dental expenses.  

  • Have a Savings Strategy

An emergency fund should be a top savings priority. To ensure that you meet the goals you set for yourself, try the “pay yourself first” method.   As soon as you get paid, pay into your emergency savings account first before the money gets spent elsewhere. 

  • Know What Account is Best

There are many options available for every type of savings, but when it come to an emergency fund the best accounts are ones that are easily accessible.  This means either a TFSA or High Interest Savings Account.  Both of these accounts have no tax penalty or withdrawal restrictions.  

  • Don’t Take Risks

An emergency savings account is meant to be there for you when the unexpected happens. That means the stock market isn’t a good place for it.  Market fluctuations have the potential to deplete the account and you could end up short of cash if you find yourself needing the money.  

The Bottom Line

Take care not to neglect this financial safe guard.  You will thank yourself in the future!

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Disclaimer

This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.