Not too long ago, the Bank of Montreal released a survey indicating that only 54 per cent of Canadians have an emergency fund of more than three months' of expenses. While this number is somewhat encouraging, it still illustrates an issue that many Canadians have in the midst of global economic uncertainties.
And what about your finances? How would you handle a financial emergency? Do you know your options?
Your Emergency Fund
Hopefully, your first line of defense for a financial emergency is your own savings account. Do you have money stored away for a rainy day? Whether you need to have car repairs done, or whether you need to supplement missed income, it's important to build up an emergency fund. Your efforts to build your emergency fund can help you down the road, providing you with the ability to tap into your assets if you need to.
Many Canadians are starting to see that a TFSA can actually be one way to build up an emergency fund, which is what we did using an orange key to open an Tangerine account. In any case, consider your emergency fund, and create one that can be a fall back for you later.
Friends and Family
Sources of help that some of the respondents to the survey listed included friends and family. If you are struggling, and you don't have the means to keep up with your bills on your own, you might need to turn to others. Can you count on friends and family to help you through tough times? Sometimes, this doesn't just mean getting money from those you know, either. Sometimes, it also includes receiving help in the form of meals, a place to stay, or babysitting for your kids. Remember that any help when you are facing a financial emergency is desirable. Sometimes the non-monetary helps can be just as important to helping you get back on your feet.
Line of Credit
There are those who keep a line of credit available for emergencies. In these situations, it's a good idea to be careful. Once you start using credit for emergencies, with no clear plan for paying it down later, you can get caught in the debt trap. You need to be especially careful when it comes to using a line of credit for emergencies. While it can be nice to know that the liquidity is there, becoming enmeshed in debt can be a real problem that can weigh on your finances.
Raiding Your Retirement
Another temptation is to raid your RRSP for money. Once again, you should think through this option very carefully. Not only do you have the more tax consequences of withdrawing money from your account, but you are also faced with the long-term impact that comes from lost opportunity. If that capital isn't in your retirement account earning money on your behalf, you are missing out. Make sure that you are truly at the end of your options before you start withdrawing from your retirement funds.
What is your situation? What would you do when faced with a financial emergency?