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How to create an emergency fund
Emergency savings can make all the difference in times of unexpected financial challenges.
“The basement is soaked!” That was my husband’s voice calling up the stairs. As relatively new homeowners who had never lived in homes with sump pumps before, we weren’t aware of their peculiarities — or relatively short lifespans. What we did know, however, is the importance of saving for surprises like this. While insurance covered some of the repair, it didn’t cover everything. We were fortunate to have a literal “rainy day fund” to tap.
Whether it’s a soggy basement like ours, an unexpected car replacement or a loss of employment, emergency savings can make all the difference in times of unexpected financial challenges. Yet according to Bankrate, 57% of U.S. adults admit they haven’t saved enough and couldn’t afford a $1,000 or greater emergency expense.
Here are some tips that you can use to evaluate your emergency fund.
First, think about what you’d need. Having a six-month cushion is important if you’ve lost your job and you are the sole breadwinner. Three months may be OK if you have an income-earning partner and relatively few expenses.
Start by adding up your monthly expenses, including mortgage or rent, utilities, car payments, groceries and credit card bills. Don’t forget subscription services such as streaming accounts. Also factor large expenses you may pay less frequently, such as insurance. Multiply your total amount by the number of months in cushion you want to save.
For more help with gauging your average monthly expenses, you can use our budget calculator Opens a new window..
Consider keeping your emergency fund in a savings or money market account. You’re looking for stability and accessibility. Your money is accessible when you need it but isn’t blended with your day-to-day expense accounts such as your checking account.
To build your emergency fund, make regular payments into the account you choose. No amount is too small. A great way to do this is to set up recurring transfers from the account where you deposit your paycheck into a savings account. This is easy to do with CIBC’s digital banking tools.
Don’t touch your nest egg
Having an emergency savings fund protects you from having to tap your retirement savings for unexpected expenses. In some cases, withdrawing funds early from a retirement account can bring tax consequences and penalty fees. Even without those, though, you lose the benefit of compounding — or the ability for your retirement savings to grow over time — when you use those funds before retirement.
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