Advisors frequently issue reminders about the importance of saving for a rainy day. Of course, there is every reason to do other things with your money. And, after all, if you hit a rough patch, an emergency fund isn’t your only option; you could use credit, for example. But you don’t need a finance degree to figure out that this solution has its limitations – and consequences.
To avoid a financial shock caused by an unexpected event, here are some tips for building an emergency fund within a reasonable time.
If discipline isn’t your forte, you may want to consider a pre-authorized contribution plan (PAC).
We can’t repeat it enough: the Tax-Free Savings Account (TFSA) is very flexible when it comes to withdrawals. You can take money out as you need it, without affecting your contribution rights and without incurring tax.1. One of the biggest advantages is precisely that a TFSA allows your savings to grow on tax-free. That’s nothing to sneeze at. None of us want to give part of our nest egg to the taxman.
As you well know, the unforeseen can and does happen – and time plays a crucial role in savings. Constantly postponing the day when you start building an emergency fund can have two consequences. The first and more serious consequence is that you won’t have a nest egg at all or that you’ll have inadequate funds just when you need them. You may find yourself having to borrow money.
The second consequence is that you’ll deprive yourself of the capital gains and income generated by your funds as they grow over time. You’ll miss out on the magic of compounding: the return you obtain each year is reinvested and in turn generates a return the following year, which itself is reinvested, and so on and so forth.
Let’s say you want to save enough to cover day-to-day expenses in the event of a job loss. First, you must set a goal. To do so, add up your essential monthly expenses, eliminating anything discretionary, then multiply the amount by the number of months you want to save for. Your emergency fund should provide you with enough money to support yourself for three to six months.
With monthly expenses of about $3,500, you have to save $10,500 to cover three months, an amount that should give you enough time to find a new job. Then you have to set a deadline. For a short-term safety cushion, two years is enough. By saving $100 a week, you could reach your goal.
In short, saving for an emergency fund isn’t too onerous. The important thing is to set a realistic goal that takes the many aspects of your budget into account.
You should also keep in mind that each case is unique, and that some tax issues require special attention. For advice on such matters, there’s nothing better than consulting a professional. Contact the FÉRIQUE Investment Services Advisory Services team or click here to open an account online.
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