Whatever You Do - Make Sure You Do This First!
Life happens. It’s a fact. Imagine meeting the love of your life, getting engaged, you’re working hard to save for the wedding and suddenly…Life happens. You know, those unfortunate events that occur at the absolute worst time? And they always suck! Your spouse becomes unemployed, you get in a car accident, a family member that lives in another province passes away – all reasons you may need to tap into your wedding savings. Not cool.
That’s why it is imperative to create an emergency fund! Seriously, start today. Unless you have a crystal ball to know exactly when the next unfortunate event may come along, you’re taking quite the risk by not having some savings socked away. Consider a small, manageable amount to get you in the regular habit of saving.
But what about my debts?
It is important to pay the minimum on debts to keep creditors off your back, but you might want to consider starting to save for your emergency fund at the same time you are paying off your debts. Create a safety net for yourself and analyze your past behaviours to avoid going into debt in the future again. Bonus: The emergency fund will help prevent going into debt in the future, or at least soften the blow if an unfortunate event does happen to you.
But what about retirement savings? Or education savings for my children?
These are important, but statistically speaking, you’ll have a need for the emergency fund before you’ll need the money for retirement in 30 years. Also – keep in mind that if you put all your dollars into retirement savings and an emergency occurs, you may have to draw on those funds to support you through the tough times. Why is that bad? If your money is in an RRSP, you’ll have to pay early withdrawal fees and taxes. That’s a big bite out of your hard earned savings.
But what about life insurance?
Life insurance is another safety net and is equally as important as an emergency fund. Generally, we will analyze your budget to fit in life insurance premiums and we like to set up the emergency fund on a pre-authorized withdrawal so it comes out of your account automatically. Creating an “out of sight, out of mind” account at another bank isn’t a bad idea, you’ll be less tempted to tap into your emergency fund for non-essential expenses.
Okay, I’m convinced. But where should I save my money so it’s accessible when needed?
Generally, a Tax Free Savings Account is a great account for an emergency fund. You deposit after-tax dollars, so when you withdraw you have no taxes to pay and all the money in the account can help alleviate the situation. TFSAs at smaller banks like Manulife or Tangerine generally pay higher interest rates than the big five banks.
P.S. Manulife is one of the companies we represent and can gladly assist you in setting up a TFSA.