Advantages to an emergency savings fund
Last updated: December 29, 2017
It was John Lennon who once sang, “Life is what happens while you’re busy making other plans.” The Beatles legend likely wasn’t talking about managing your financial portfolio, but his message of expecting the unexpected can easily be applied to your savings situation.
Most of us look at savings as a means to an end. Whether you’re squirrelling away for the long run or stashing cash for a trip to Coachella, savings is usually viewed as goal-orientated. But what about savings as insurance for when emergencies happen?
A healthy savings account is more than just dormant money, it can save you from heavy credit card payments when the unexpected happens.
Savings - borrowing at 0% interest
As Lennon so eloquently reminds us, the unexpected can happen while we’re busy making big plans. On one typical rainy day here in Vancouver, I dashed into the car, turned the ignition and hit the wiper switch. Nothing moved as rain drops pelted the windshield.
Replacing the worn-out wiper motor cost me $600. Only weeks later, I was informed by the same unsympathetic mechanic I needed a new “oxygen sensor” (whatever that is). There goes another $600.
Although I was now down $1,200 no thanks to a cranky Volkswagen showing its age, in an indirect way I actually saved money. If I had put both charges on my credit card, I would be facing near-future payments with a hefty 20 per cent premium. But because I borrowed from my emergency savings fund, I paid a very attractive rate of 0% interest.
Car owners know all about these unwelcome repair bills, but pricey surprises can happen to anyone: the cyclist who gets their bike stolen, a homeowner with a fridge on the fritz, or even a sudden loss of employment income leaving you scrambling. No one is safe.
What goes out, must come back in
In order to use your emergency savings worry-free like a no-interest credit card, always strive to replace whatever amount you borrow. If treated like a one-and-done transaction, you’ll be left at the mercy of daunting credit card payments when the next unforeseen situation occurs and your emergency savings will be long gone. Remember: if you take it out, try to pay it back.
How to quickly build your emergency savings
Over at thesimpledollar, you’ll find a step-by-step plan specifically geared to creating a healthy emergency fund.
They recommend setting your initial savings target low, anywhere from $250 to $500 to start. The aim is to set a goal you can reach in a few months by putting away a reasonable amount like $25 a week. That could mean a few less beers and coffees, but certainly doable for most.
If you feel like your will power isn’t strong enough to make these small sacrifices, consider automatic savings deductions that sweep from one of your bank accounts into a savings account you’ve dedicated to emergencies.
The simpledollar also recommends setting reachable goals you can celebrate as milestones along the way to encourage yourself. Once you hit $500 in your emergency fund, see if you can take it to $1,000. If you can then double that amount, you’ll have a strong safety net to catch whatever unexpected curve ball life pitches at you.