How Do You Save for Emergencies When You Have Debt?

Debt is a reality for millions of Canadians. It can be caused by job loss, divorce, illness, or just bad luck. Of course, the COIVD-19 pandemic didn’t help matters, and many saw their debt increase significantly during this time. And the truth is debt can be seen as an obstacle for those trying to build an emergency fund.

So how bad is Canadian debt? One survey reveals that nearly 75% of Canadians have some type of outstanding debt or used a payday loan at some point over a 12-month period. In addition, confidence in personal finances has taken a hit, with many stating their ability to repay their debt has hit a record low. While it’s important to take care of debt, it should also be a priority to set up an emergency fund. Unfortunately, having a mountain of debt can make this feel impossible. 

What is an Emergency Fund?

It’s important to create an emergency fund, even while you’re paying off debt (we’ll get to ways to do this shortly). 

And it’s also important not to confuse an emergency fund with a ”rainy day” fund. 

A rainy day fund is meant to cover “irregular expenses,” for example, an unexpected bill. Perhaps a car repair, clothing, or a vet bill. These are things that should be planned for, and it’s counterproductive to use credit to take care of them. When they do come up, don’t reach for your credit card; instead, dip into your rainy day fund. That’s what it’s there for.

Now, a rainy day fund isn’t expected to be as much as your emergency fund. 

An emergency fund is designed for when life hands you extended financial stress due to major life changes, such as the aforementioned job loss, divorce, or illness. These are things you typically can’t plan for. So ultimately, an emergency fund is a large financial safety net while a rainy day fund is intended for smaller, irregular expenses that come up from time to time.

7 Tips to Start Your Emergency Fund

Creating an emergency fund is critical, even while you’re paying down debt. You should not put off creating this fund until you’re debt-free because building an emergency fund will help ward off future financial problems. 

So, how do you get started? Here are 7 tips to consider.

1. Track Your Expenses

Do you know where all your money goes? Some people are surprised to learn where they spend their money when they track their expenses. Doing so helps them figure out where they may be able to cut back and then move this money into an emergency savings account. If it sounds like a hassle, we’ve got you covered. Credit Canada offers a free expense tracker that you can download here to keep tabs on your expenses. Download our Budget Planner + Expense Tracker.

2. Set Your Goals

How much do you need to save in the event of an emergency? One way is by adding up monthly costs for housing, food, transportation, and other necessities and then multiplying this by three to get your basic emergency fund started. If you can multiply it by more (up to six), you’ll be in even better shape should you run into financial turmoil!

3. Find a Bank That Pays You

Now that you’re ready to save, find a bank that offers cash incentives to new customers by opening chequing or savings accounts. Use the incentive to jumpstart your emergency fund and to get motivated to add to it! 

4. Create a Direct Deposit

It can be difficult to have a bank automatically pull money from your paycheque, but ultimately, it can be worth it. And, after the first initial deposits, you might not even notice money is missing from your paycheque. Of course, it’ll be there in your emergency fund when you need it most. It’s all about building the habit: Start with a small amount, say $25. Automate it so that on each payday, it’s transferred to your emergency fund.

5. Slowly Increase Your Direct Deposit

Now that you have a direct deposit creating your emergency fund, and you’re getting used to the adjustment in your paycheque, gradually increase the amount you move to your emergency fund. Start slowly—bump that $25 to $30. And before you know it, you’ll have a small nest egg.

6. Save New Money

Every now and then, we get an unexpected windfall. A family member might send us some money, we could get a tax refund, or maybe win some money in a lottery.  When the unexpected does happen, put that money into your emergency fund, and pretend you never received it! 

7. Watch Your Spending

We know this sounds like an obvious one. But, sometimes we spend money where we don’t need to. Check out our blog on 21 Ways to Save Money.

Free Debt Help is Available

In a recent Moolala podcast, Alyssa Davies, the founder of Mixed Up Money and author of Financial First Aid: Essential Tools for Confident, Secure Money Management, had a lot to say about creating an emergency fund. Learn more as she walks through planning for financial emergencies in this Moolala podcast.

She also has some thoughts on seeking debt help, saying:

“Don’t feel shame or guilt. Everyone else is making mistakes. Debt consolidation places exist for a reason. If you’re dealing with massive stress, where you can’t sleep at night, you can’t make the minimum payment on credit cards, and you’re getting collection agent calls daily, then it’s time, and perfectly okay to ask for help and speak with a professional. They can negotiate on your behalf, or at least offer you a plan with tangible steps to give yourself a fighting chance.”

We couldn’t say it any better! If you’re struggling with debt management, contact the caring professionals at Credit Canada. We’re always here for you!