I’m going to give you guys a crash course in how I set up my emergency fund, which – spoiler alert – is a textbook example of what not to do.
You too can do emergency funds all wrong, in just two easy steps!
Step 1: Give yourself legitimate reasons to withdraw money from your emergency fund – frequently.
When I got my first real job out of university, I went straight to the bank and opened up a TFSA and an RRSP, and proceeded to funnel 10% of my paltry entry-level salary into each account. Which is great, right? Good job me, being so disciplined!
I knew that keeping up that level of savings would mean I’d need to save up for any big purchases I saw in my future. Things like Christmas presents for my family, or new running shoes, do not just “happen” on 80% of an entry-level salary if you still want to do fun things like eat and pay rent.
At the same time, I knew that I should really save up an emergency fund, ideally to cover a few month’s expenses.
So instead of saving a bit towards my emergency fund, and a bit towards big purchases, I bet you can guess what I did next.
I used my emergency fund savings as my big purchase savings, and vice versa. All in the exact same account.
Now sure, you’re probably thinking, you made that mistake as a new grad. Now that you’re a learned adult, you’ve changed your ways. Right?
Step 2: Keep doing this for years.
It’s been over three years that I’ve had this stellar* system going. On one hand, I have never carried a credit card balance, and this account has seen me through a mom-sponsored trip to Italy, several pairs of running shoes, a layoff and The Dog making his grand entrance into my life (and my bank accounts.)
On the other hand, it’s never managed to maintain a balance much above $2000. That’s a very solid month of expenses for me, but not more. Some emergency fund, right?
Editor’s note: With the benefit of time and ~experience~, I want to note that I was way harsh on myself in this article when I wrote it a few years ago! Yes, I needed to change my behaviour because I wanted to save up more money, but my emergency fund was pretty much the best I could do at the time, and I did it. That’s really all you can ask of yourself as you’re starting on your financial journey—and hey, my emergency fund still kept me out of credit card debt. That’s a big win.
Step 3: Realize the error of your ways.
This one, I would probably advise doing. I think it’s going to work out well for me.
Last Tuesday, I sat down and opened a new savings account with Tangerine labelled exclusively “Emergency Fund.” This marks the end of the “Short-Term Savings” era, which is the ultra-generic account name I had been using previously.
I also opened an account for “Big Home Purchases,” since my poor 15-year-old double bed is looking a little worse for wear, and a new mattress is probably in my future. Since purchases like these are (big win!) no longer coming out of my “Short Term Savings” account, I’m starting from scratch and treating it like the separate savings goal that it is.
To add to my plethora of savings accounts (they’re free, I’m allowed) I also added a “Vacation and Gifts” account too. Since I already have an emergency savings account started for The Dog, because he’s a accident-prone butt and I love him, I’ve now taken care of the only other real reasons I had to raid my emergency savings in the first place.
Step 4: Be patient. It’s a process.
Ok, that makes two steps in a four step process of how NOT to do something that I would really recommend.
If you’re writing a textbook, this is probably not the textbook example you want to use.
Because these accounts are all separated now, I’m going to miss seeing the balance going up in leaps and bounds every month. (Little leaps and tiny bounds, but still.) That’s what happens when all of your savings goals are under one account-roof – the balance goes up quickly. On the other hand, it goes down just as quickly when you need it for something.
Now, each individual account is on the slow-and-steady path to achieving the different goals they’re each there to serve. They might not grow quite as quickly, but the ones that are meant to stay put also won’t go down every time I pull out an unrelated expense.
That emergency savings account, for the first time ever, is not about to be raided in anything short of an emergency situation.
Did you start off with an emergency fund account dedicated solely to emergencies? Or did you – like me! – take the, ahem, “scenic” route to getting there?