3 Tips for Building a Better Emergency Fund

One of the best things you can do for your finances is to build a better emergency fund. If you want to protect yourself in the even of financial setbacks, it’s a good idea to have an emergency fund that works for you. From paying a high deductible on your insurance policy, to providing you with a way to pay bills if your hours at work are cut, an emergency fund can be very helpful.

As you prepare to build your emergency fund, here are 3 tips that can help you make it a little better:

1. Start Small

Many of us feel overwhelmed when we listen to experts who tell us that we need nine months’ worth of expenses saved up. If your expenses total $3,000 a month, that’s $27,000 you need! Focusing on big numbers like that can be discouraging, and lead you to not set anything aside at all.

Instead, start small. Focus on what is doable right now, rather than the end result. Go through your budget, and determine how much you can set aside right now. Once you’ve done that, start putting it in an account. Then consider ways you can increase what you set aside until you reach your goal.

2. Consider Accessibility

Your next step is to consider accessibility. You want to be able to get to your money when you need it. Tying it up in an investment account can be problematic, especially if you run into a true emergency that requires that you get your cash quickly. Sometimes, this means that you give up some of your return so that you can get to your money quickly. An account connected to an ATM card, or an account that is linked directly to a checking account with debit access, are good choices if you want immediate accessibility.

It’s also possible to consider different types of emergency setups. You can keep part of your fund in an immediately accessible account, and then keep the bulk of it in an account that is a little harder to get to, but offers better returns. For instance, you can keep a smaller amount in the local bank, where you can use it immediately while you wait for a larger amount to be transferred from an investment account after you sell some assets.

3. Look for High Yield and Other Benefits

Now that you know which accounts are quickly accessible, it’s time to try and get the highest possible return that you can. Unfortunately, savings accounts are known for low yields. When you have money that is basically safe, and easily accessible, it’s not going to pay you a very high yield. You can turn to high yield accounts to help ease some of the pain, by giving you the best possible return for your money.

If you are building an emergency fund portfolio, with different types of accounts, you can create a GIC ladder for better yields. You can also consider a TSFA, which comes with tax benefits, as well as the possibility of better returns.

Put together a plan for your emergency fund, and you will be able to get the best possible performance outcome.

Written by Tom Drake

Tom Drake is the owner and head writer of Canadian Finance Blog. While you’re here, consider signing up for the RSS feed or email subscription. Both deliver the latest articles directly to you! You can also follow me on Twitter for all the latest posts or to send me any comments or questions!

3 Responses to 3 Tips for Building a Better Emergency Fund

  1. I remember a few years ago, wondering how in the world I was going to save $1000 (Dave Ramsey’s idea). Then I suddenly came into two surprises and there it was! However, even starting small has great dividends in the stress department! I know there is money in back of me and that makes a difference. All I can say, is build it and then get on with paying off the debts!
    I’m learning about the ladders for later!

  2. I would suggest also putting money that you don’t need for a while, such as a year, and transfer it to a savings account each month. So it isn’t there to spend and you won’t miss it going out of your account. Then you won’t panic when the item you need to pay for comes up in a year’s time. (Such as road tax.) You’re also less likely to have to dip into your emergency fund doing this.

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