Q: My heart goes out to the tens of thousands of people in the interior of B.C. who have had to leave their homes because of the fires this year. While we haven’t been impacted by this, we would be in rough shape if we were. We’ve managed to get our debt under control but have minimal savings to deal with a crisis like this. I think we need to start a savings plan to help us out in case we were hit by an emergency but my husband thinks we should pay off our debt first and then start a savings plan. We could use an objective opinion on this. ~Sophie
A: Whether it’s a financial crisis caused by a forest fire, a flood, or a more common crisis like unemployment, unexpected emergencies happen and usually at the worst possible time – or so it seems. The best way to manage through a financial emergency is to follow the motto of the Boy Scouts "Be prepared." This means having a well thought out emergency plan to minimize any potential risks, which will include an emergency savings fund.
I can appreciate your husband’s desire to pay off all of your debt first before starting a savings program. However, if you were hit by an unexpected emergency, you would likely have to take on more debt to get through the crisis which would be counter-productive to your plan to get out of debt. A better solution would be to keep paying down your debt but at a slower pace so that you have the ability to start a savings program and address other important considerations. To help you and your husband, I’ve outlined a number of action steps to take that will help you get through an unexpected crisis.
Getting Through the First 72 Hours
Experts advise that with a major catastrophe the first 72 hours are critical. During that time you may need to be self-sufficient and have your own food, water, and resources on hand until help arrives. If you have to leave your home or area for safety reasons you may not have a lot of advance warning, so having a plan in place and knowing what to do and what to take with you will be a big help if you need to leave in a hurry.
Public Safety Canada has developed an emergency preparedness guide in collaboration with a number of different relief agencies. The guide addresses the first 72 hours and how to make a plan and prepare an emergency kit. This will help you get ready for the worst case scenario and is an important part of your overall plan.
Determining the Amount of Emergency Savings to Have on Hand
Based upon the experiences of our clients, we recommend having the equivalent of a minimum of three and preferably six months of living expenses set aside in a separate savings account for emergencies. If you are a home owner and have a mortgage, we would strongly encourage you to work towards having a savings goal of a minimum of six months of living expenses. This will help you get through the emergency and minimize the possibility of having to sell your home out of necessity.
If you’re not sure how much your actual monthly expenses are, I would recommend recording your regular fixed amount expenses like rent, mortgage, insurance, minimum monthly debt payments and tracking the rest of your expenses for at least a month to get an accurate picture of your monthly expenses. Don’t forget to include a monthly allocation for seasonal and annual expenses too.
Related: We've created an interactive Excel Budgeting Worksheet that can help you balance your budget
Putting Your Emergency Savings Plan in Action
The thought of saving up three let alone six months of living expenses may seem like an impossible goal – especially if you’re paying down your debt at the same time. In reality, it may only be possible for you to save up the equivalent of one-half or one month’s emergency savings each year until your debt is paid in full. Once you know how much you can realistically save each year, break it down into a monthly goal. Whether it takes you three, six or more years to reach your goal is not important. What’s important is that you are working towards your goal.
Related: Also feel free to check out our 7 Steps to Saving an Emergency Fund
Your monthly savings goal will need to fit within your budget which means you will have to make some adjustments in the amount you spend each month to accomplish this. If you are not already using a budget, now is the time to put one in place. There are lots of budgeting tools and information online to help you get started (including on this website). Once you have recorded all of your monthly expenses on your budget, look for opportunities to reduce your spending a little bit across all of your expense categories until your savings goal fits within your overall plan.
Open a Separate Bank Account for Your Emergency Savings
The easiest way to reach your savings goal for your emergency savings account is to put your goal on auto-pilot. Go onto your online banking or contact your financial institution and have them automatically transfer funds into this savings account each payday or once a month depending upon what works best for you. To reduce the temptation to utilize these funds for other purposes, ensure that you cannot access the funds with your bank card. Little emergencies may arise from time to time, but to keep your savings program on track, I would only resort to using these funds as a true last resort.
Related: If you suspect impulse spending is hindering your financial progress, check out these tips to curb it
Other Tips to Consider When Making an Emergency Plan
- Review your insurance coverage with your insurance broker to ensure you have adequate coverage and to know what you are covered for.
- Take pictures of your belongings and store them electronically in the event you have to file an insurance claim.
- Make electronic copies of all important financial and other documentation. Store the copies in the cloud for safe keeping or on a memory stick stored in a safety deposit box.
- Temporarily lower personal loan or line of credit payments to interest only status if you’re facing a financial emergency.
- Review your plan and savings each year to ensure you are on track with your goal and adjust accordingly when your circumstances change.
- Contact a not-for-profit credit counselling agency for assistance if you are caught by a life event/financial emergency before you are financially ready.
The Bottom Line on Preparing for a Financial Crisis
Having a detailed plan that helps you to prepare for a short term or longer term crisis together with adequate emergency savings is the best way to manage through a financial crisis. While an unexpected emergency is stressful, being prepared will minimize the financial impact and reduce the likelihood of needing to take on debt to get through the challenging period. Don’t be afraid to seek the help of qualified professionals as well as friends and family to help you get back on your feet. In times of need, that’s what they are there for.