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How To Build An Emergency Savings With Staying Power
Having an emergency savings in place can make a difference in the short-term and the long-term. You never know when something is going to happen that is going to require money. With a savings in place, you can be adequately prepared for almost anything.
According to the 2012 TD Canada Trust Report on Savings, it was found that 38 percent of Canadians do not have an emergency savings that can cover them in an emergency situation. Job loss, a broken down car, medical bills, and unexpected home repairs are all examples of emergency situations that come about. Lack of a financial savings net has caused nearly 50 percent of individuals to face serious cash crunches in which they have had to turn to their family and friends for help.
Most credit counselors will agree that it can take two to five years to build up an emergency fund that is sufficient enough. Many individuals fail at building a savings because they set goals that are too challenging and that leads to them giving up too easily because of the frustration.
What consumers need to do is set reasonable goals that are more within their reach. That way they can have the money that they need to cover emergency situation. When the money is set aside, the emergency situation can be taken care of with ease rather than worry.
Basics Of Emergency Funds
The average Canadian should have at least three months worth of living expenses in their savings account. If you own your home, you should have six months worth of living expenses. This can keep you from having to do something, such as sell your home when you are faced with a financial crisis.
Nonetheless, you have to take care when building this emergency savings because you do have other debt that you need to pay down. It is recommended that you take a balanced approach. Pay down your high-interest debt, while also setting aside funds each month for your emergency savings. This helps you make sure that you do not find yourself having to rely upon your credit cards when an unexpected emergency occurs. The goal in this is to save up a month of living expenses each year while you reduce your debt.
As for why it is not a good idea to use credit cards for emergencies, you will be paying for that emergency for quite some time if you do. The only time a credit card should be used is if there are no other options. For instance, you may break down on the road and need to get the car fixed so you can go to and from work. If your savings is not yet in place, a credit card may be what you need to use for the short-term. This is when you need to determine what monthly expenses will be reduced so you can pay off the extra debt incurred in the situation.
Consumers tend to be a lot more careful in how they spend money in their savings accounts because of the amount of effort that goes into building them and the discipline involved in maintaining them. A credit card is not that difficult to begin with. All the credit card does is defer the financial difficulty.
Planning Your Emergency Fund
A common question is whether or not a young person should plan differently than someone over the age of 55. Typically, the monthly expenses of a young person are less than that of someone over 55. This means that their emergency fund will probably be smaller. However, young individuals need to keep a close watch on their savings because their expenses are going to increase as they advance through life. Getting married, starting a family, buying a car, buying a home, and taking on other obligations can change how much a person needs in an emergency.
As you approach the age of 50, having 12 months of living expenses in your emergency fund is very important because it is more difficult to replace the same level of earnings, especially if unemployment is the problem. An older person will most likely have more difficulty finding employment.
As for the consequences of not having an emergency fund, the most common is the selling of assets to cover the situation. Many people have had to dip into their retirement funds as well, which can hurt their futures. Some consumers even take out additional debt, which takes years to pay back. Even worse, the consumer's credit rating can be seriously impacted if they find themselves without a savings and in a situation where they cannot keep up with their expenses. The horror stories seem to occur every single day and some of these individuals have considered going to extremes because they didn't see a way to get out of their situation.
Take Baby Steps
To build the savings that you need, it is best to take baby steps. The first step is to create an emergency fund after you have identified all of the monthly and annual expenses that you have. When getting started, track expenses for just a couple of months, noting which expenses you can cut and which would have to be supported through an emergency savings. Reducing your expenses by just 10 percent is very reasonable. Canadians should also work toward saving 8 percent of annual and seasonal expenses each month.
For those who have a tendency to spend their savings, they can open a Tax-Free Savings Account, which discourages overspending. These accounts grow tax-free and it can take over a day to withdraw money from these accounts, which helps lessen the temptation to spend it. This enables individuals to have the funds on-hand to get them through a tough situation. In turn, this can have a positive influence on the future.
You never know when the unexpected is going to happen, which is why it is important for you to ensure you have the money set aside to take care of any issue that may come about. When you do, you will feel much more secure and less stressed over the situation.
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