How much emergency money do you really need?

Understanding the funds we sock away for a rainy day is a little like those moving targets at the arcade. Canadians aim and fire, but only occasionally do we hit the mark.

Why are we such poor shooters when it comes to stockpiling savings for an emergency? Talk to financial guru Gail Vaz-Oxlade and she’ll tell you one of the reasons rests squarely on the backs of the country’s financial institutions, which have grown adept at selling Canadians credit by pointing to the need for an emergency fund.

“The line of credit eliminates the need for people to save an emergency fund so why would they then be surprised that people don’t have an emergency fund?” Vaz-Oxlade said.

“Because you told them they didn’t need one, that’s why. That’s the problem with putting financial literacy in the hands of pariahs. They absolutely share part of the blame.”

A Bank of Montreal survey released this week found that 56 per cent of Canadians have less than $10,000 set aside in the event of a financial emergency such as a job loss or illness. The online survey, conducted by Pollara, also found that 24 per cent of respondents reported having hardly anything at all saved for a sudden loss of income.

Vaz-Oxlade said an emergency fund should comprise six months’ worth of essential expenses such as housing and food costs. Cable can be cancelled and you can switch to a pay-as-you-go cell-phone plan to reduce costs. She also recommends getting one or two, if needed, part-time jobs to help stretch your emergency fund.

“All a line of credit is is debt waiting to happen,” she said. “So once you’ve used up your line of credit now you have no job and debt payments. How is that a solution to a problem?”

Personal finance commentator Preet Banerjee says three to six months’ of household expenses is a good baseline for Canadians to aim for for emergencies. But depending on your needs and the type of work you do, you may want to adjust the numbers.

“For some people who are quite risk averse, maybe they’re working in a volatile industry, say oil and gas, they may want more than three to six months of living expenses because their risks are a bit higher.”

Take the time to draw up a household budget, taking into account monthly living expenses and those annual expenses that invariably crop up such as birthdays, vacations and Christmas, he advises. While you’re at it, set up an automated savings plan for your emergency fund. If you can’t afford much start small and know that you can always opt out of it if you’re finances are too limited. The beauty of having automated savings is that you don’t feel the financial hit after a while.

Setting aside extra cash is undoubtedly difficult for low-income earners and Vaz-Oxlade thinks the government and corporate Canada need to step up to the plate by raising the minimum wage to at least $15 per hour.

“We have to pay a living wage and corporations have to start picking up their fair share of the tax burden,” she said.

“Because right now what corporations are doing – like the Bank of Montreal who’s talking about people not saving for emergencies – is they’re doing everything in their power to not have to pay taxes.”

But the TV personality and financial author also thinks Canadians need to take ownership for their financial misery. Many of us are lousy planners, who poorly assess risk and who go through credit like it was penny candy. Vaz-Oxlade ran an online contest recently in which 600 participants entered to win the grand prize of $5,000. The catch? A weekly series of exercises that would ultimately earn them financial stability. By the time the contest was over, only 100 candidates were left standing.

“People don’t want to do the hard work,” she said.

“It’s that simple. People would rather spend their money than save it so when the caca hits the fan, it’s an emergency but they created the emergency themselves.”

Getting your financial ducks in a row can be daunting, but there are a few simple things you can do. Banerjee recommends taking a hard look at your debit and credit expenses to identify those smaller recurring charges, such as fees for online software subscriptions or gym memberships that you can cut out. In other words, he says, replace automated expenses with automated savings.

“Most people would have $50 to $100 a month they could cut,” Banerjee said. “Now the trick is to save the savings.”

He also recommends using your tax-free savings account as a vehicle for setting up an emergency savings fund. Once your savings grows and you’re able to cover three to six months of living expenses, you should think about moving it into a higher-growth investment fund.