As fears of a recession grow, six tips for building your emergency fund

Recession: The word has started to surface again in comments from economists as stocks tumble and central banks around the world raise interest rates to fight runaway inflation. While experts disagree on the likelihood of another downturn in the next two years, the pressing question for your personal economy is: do you have an emergency fund?

A cash cushion is essential to mitigate any impact on your income in the event of an economic crisis. Saving for a rainy day requires an income that will cover more than the basic necessities. Not surprisingly, households earning less than $40,000 are less likely to have money in reserve.

At the other end of the spectrum are the lucky Canadians who have collectively racked up an estimated $300 billion in additional savings by keeping their jobs and lowering their spending while cooped up at home for much of the pandemic. .

But if you fall somewhere in between these two groups — you have a decent income but little or no emergency savings — you should start building or boosting your financial rescue fund right away, experts say.

Here are some tips to help you get started:

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Try to match your largest expense at the start. The classic recommendation, in terms of how much to save, is to aim for between three and six months of living expenses. If you’re just starting out, however, this goal can seem daunting. Instead, Zainab Williams, financial planner at Elleverity Wealth Management, suggested focusing on matching your biggest monthly expenses first. For most people, she added, it’s the rent or the mortgage payment.

Once you hit that first threshold, Ms. Williams said, your next step is to double that amount. Then move on to the traditional three to six month goal.

Keep cash separate but easily accessible. Keep your emergency savings in cash and separate from your daily checking account, said Alyssa Davies, founder of popular Canadian personal finance website Mixed Up Money and author of Financial first aid.

Ms. Davies suggested choosing a savings account with a competitive interest rate for this purpose. This could be at a different financial institution than where you do your day-to-day banking, but make sure you can access funds quickly if needed. An electronic transfer to yourself can be a faster way to transfer money than a traditional bank transfer, she noted.

Payments: Automate them and start small. Once you know how much to aim for and where to save, automate regular deposits into your emergency fund. If you’re struggling to set aside hundreds of dollars a month, Davies suggested starting small. “Reduce the amount you save and increase the number of contributions,” she says.

It can help to set up small transfers as often as once a day for each working day, she added. “If I make $100 a day, how much can I afford to give up to go towards my savings? Is it $1, $3 or $5? »

Find other ways to generate money. Taking a side gig can help you save faster and also mitigate financial risk during a recession by diversifying your sources of income, Ms. Williams explained. Configure your extra income to go directly into your emergency fund, she added.

Decluttering your home can be another way to help fill your rainy day fund, she noted. Online platforms like Facebook Marketplace make it easy to find buyers for everything from gently used furniture to clothes that no longer fit.

Own a house? Establish a separate “sinking fund”. Emergencies happen, including when you’re building your emergency fund. Don’t be surprised if the process of building your financial safety net feels like a “two steps forward, one step back” dance, Davies said.

Yet if you’re a homeowner, you’re even more likely to face unexpected expenses on a regular basis. Ms Davies suggested tackling the problem by having at least two separate rainy day funds: one for urgent home repairs and one to help you through a period of unemployment. This way you won’t have to loot your unemployment slush fund when the furnace breaks.

Emergency funds vs lines of credit. Lines of credit are best kept as a financial resource of last resort, Ms. Williams said. Being able to tap into a line of credit — which typically offers relatively inexpensive, flexible borrowing — can come in handy if your emergency fund isn’t enough, she said.

But viewing a line of credit as your only fallback option is risky, she warned. “The ideal situation is that you never touch the line of credit and always have it in your back pocket,” she said.

Keep in mind that lines of credit have variable interest rates, which means your borrowing costs will likely increase if the Bank of Canada raises its benchmark interest rate, as it has done in the past. twice this year and should continue to do so for several more months.

Lenders may also, at their discretion, increase your interest rate, reduce your borrowing limit or require you to repay your outstanding balance at any time. And while it’s unusual for banks and other financial institutions to change your credit agreement — and if they do, they must provide notice — it becomes a higher risk during a recession.

Are you a young Canadian with money on your mind? To set you up for success and avoid costly mistakes, listen to our award-winning Stress Test podcast.

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