Personal finance sometimes draws lines between the ‘paying off debt as fast as possible’ and the ‘saving for the future as much as possible’ teams.
The benefits and downfalls of paying off debt aggressively vs savings aggressively have been debated in many personal finance blogs and circles. (Such as Debt as an emergency, Emergency Fund is necessary, or the $10 000 Emergency Fund )
But you have to do both!
Yes, paying off debt, especially high interest debt is the most beneficial step and the step to save you the most money in the long run. If you don’t believe me, please calculate your debt like I did or using Gail Vaz Oxlade’s Own up to Debt Calculator.
Paying off debt for a lot of people is a long process, often spanning years. In 2-5 years life happens. Life happens a lot. And when life happens you cannot use your ever decreasing debt to bail you out. You also should NOT use credit to bail you out! (Or your parent’s, or your partner or your sale of an organ).
You need to have an emergency fund. A holy shit fund. A security blanket made of money. Oh and it should be individual, because the most serious shit is the stuff we never plan for (breakups/divorce, partner getting injured or killed, losing a job).
Unfortunately emergencies don’t always have to happen to us to be real emergencies. I was living across the country when my grandfather passed away and I had to fly back with three days notice. I had to be there for myself and my family, and it was an emergency for me. What’s going to happen to you then when you don’t have a decent amount of money to cover these already too emotional and difficult situations?
Emergencies come in all shapes in sizes and my father often talks about how bad luck comes in threes.
Whatever your superstition, it’s really critical for you to have an emergency fund.
This money should be different from any short or long term spending or savings goal. This should be highly accessible at a moment’s notice, but probably not under your bed.
Many people choose a TFSA in Canada as a decent vehicle for a emergency fund since you can withdraw from it at any time, but it is also separate from your everyday chequing account so you should be less tempted to use it to pay for, say, a pumpkin spice latte.
Tips for your Emergency Fund
- Experts say you should have 3-6 months of total living expenses in an emergency fund, but it depends on your situation
- Aim to contribute $100-200/month, but start at a pace that works for you
- If you are the sole support of children or older parents, you likely need more
- If you are single, in a stable job with little other debt, you might need less
- Store it in a highly accessible (liquid) place like a TFSA
Emergency funds really get at people’s emotional reaction to money. Some people have very strong senses around being stable and secure and find that comfort in a large emergency fund. Other folks see money as a means to an end and want to put money to ‘productive’ means like paying off debt or investments. You figure out where you fit and what is comfortable for you.
I personally aim for a specific number instead of a certain amount of months. Since I am a renter, I personally need to have first and lasts month rent, plus at least 1-3 months living expenses in my emergency fund. Right now my goal is $4500
To calculate living expenses, I created two budgets. One for normal, everyday spending including all the frills that I have to be comfortable: cell phone, internet, clothes, etc. I also have a ‘bare bones’ budget, where it is just basic living expenses like rent, food, utilities and debt repayment*.
*Yes in some emergencies it is a good idea to put debt repayment on the back burner, and for some debt like student loans there are programs designed to help you in this situations (RAP ), but it is important to use these programs sparingly. *
The thought of having thousands of dollars in savings when you have none currently can be overwhelming. Start with manageable goals, like $100 or $500 and slowly use these milestones as motivation.
What are your thoughts about emergency funds?