What is an emergency fund, and how can you create one?

(NC) An emergency fund is money that you set aside to pay for unexpected expenses, such as urgently needed car repairs or an emergency veterinarian visit. The fund can also be used to help you pay your bills if you lose your job or develop a health issue that prevents you from working. Here are four key things to know about emergency funds.

Why do I need an emergency fund?
Life can throw a lot of unexpected costs our way. If you are hit with an emergency expense and don’t have the money available to cover it, you’ll have to find other sources of money. That could be in the form of a line of credit or, if you don’t have access to one, you might be forced to turn to payday loans or other high-interest options.

How much should I save?
According to Statistics Canada, one in four Canadians is unable to cover an unexpected expense of $500. Yet a commonly cited figure is that you should set aside enough money to cover three to six months’ worth of your regular expenses. That might seem like a lot, but it’s intended to help you avoid going into debt if you are between jobs or unable to work for an extended period of time.

How to build a fund
With many of us struggling to pay our daily bills, it might seem impossible to build an emergency fund. But the sooner you start, the better off you’ll be when an unexpected cost comes your way. Investing just a few dollars each month will eventually add up to a nice nest egg. For example, by contributing just $5 a week to your fund you’ll have $260 in your account by the end of the year, plus any interest that money has earned.

Here’s an easy way to get started: whenever you pay for something in cash, stash the change in a bowl or jar and then add that to your fund on a weekly or monthly basis. If you do come into an unexpected windfall, such as a gift of cash, a tax refund or a bonus at work, consider adding that to your fund.

How to grow your fund
To avoid the temptation of using your emergency fund on regular expenses or a splurge purchase, you should set up a separate savings account to store the money in. Look for an account with the lowest possible fees and the highest interest rate so that your money grows while it’s in the fund. You can use free online tools that compare the fees and interest rates of the various Canadian savings accounts.

Find free financial resources at abcmoneymatters.ca.