So you’ve paid off all your debt and want to start to build your savings and investments? Before you start working on building up your RRSP, your first savings priority should be an emergency fund.
I’ve mentioned previously that I don’t believe an emergency fund makes much sense if you still have debt. By paying down debt on a credit card or credit line, you then free up that balance, which could be re-borrowed in the event of an emergency.
But if your debts are paid off, an emergency fund acts as a form of insurance. The money is there if you truly need it, without having to go into debt or withdraw from your RRSP. Most often, emergency funds are described as a safety net in case of job loss. This is due to the question of how big your emergency fund should be, which you might hear back anything from 3-12 months worth of expenses. Another good use for an emergency fund would be to use it for your home or auto insurance deductible. Having the money saved in advance gives you the ability to raise your deductible to reduce your insurance premiums.
It’s likely that you’ll need to save up to reach those goals, so how much is the minimum you should have in your emergency fund? I think a true bare minimum would be either enough money to cover one month’s expenses or your insurance deductible, whichever is highest. So maybe this is $1,000 for some, might be much more for others. From that point, keep adding savings from each pay cheque until you reach an amount you feel comfortable with. Once you have the total amount saved in your emergency fund, you can practically forget about it until the need arises.
You want to be able to get your money out quickly in the event of an emergency, maybe not so easily as having it linked to your debit card though. A high interest savings account, possibly within a TFSA, would be a good choice.
Keep in mind, this account is for true emergencies, not for a car, vacation or Boxing Day deals… of course now that you have an emergency fund, you can now start up separate savings accounts for these items as well!