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Canadians shun emergency funds

Liam Lahey

Canadians are playing the odds: Many of us don't have any money set aside to deal with job loss, significant medical bills, out-of the-blue home repairs or other unexpected expenses.

According to Raymond Chun, senior vice-president for TD Canada Trust, the overall number of Canadians that still don't have an emergency savings fund is alarming.

"We have about 38 per cent of Canadians that really don't have any way of meeting what we'd call life's unexpected surprises. I'd say that percentage has been fairly consistent (to previous years)," Chun says. "Having said that, it's promising that about 53 per cent of us are starting to save and we're beginning to see a bit of an upward trend. But generally, savings needs to be more of a priority for most Canadians."

Chun cites the "2012 TD Canada Trust Report on Savings", which finds 53 per cent of Canadians admit they have been in a situation where they needed to rely on cash savings to navigate an unexpected life event, yet only 26 per cent of this group had a fund set up.

Of those who didn't have an emergency fund:

  • 49 per cent had to depend on friends or family

  • 36 per cent used their credit cards

  • 35 per cent relied on a loan or line of credit

  • 16 per cent dipped into their savings account

  • 14 per cent dipped into their RSP

There never seems to be enough cash to go around, but that's all the more reason to try and squeeze some extra money out of your budget for savings.

"You do need to make a decision. Is it a priority to put away a few dollars for the unexpected surprises? The other thing is to try to automate where you can some savings. That's where I've seen people be successful," Chun says.

While they understand the importance of saving for life's surprises (only three per cent don't think a savings fund for unexpected expenses is necessary), Canadians cite a variety of reasons for not having one:

  • they're "broke" (56 per cent)

  • paying off debts from credit cards or lines of credit (46 per cent)

  • servicing their mortgage (14 per cent)

  • saving for retirement or their child's education (seven per cent)

"It's amazing, once you start to do the math, how you can find some dollars that you're spending today that you could be saving."

If you're carrying a lot of debt via high-interest credit cards, for instance, Chun advises discussing the matter with your bank to see if it's possible to consolidate that debt.

Once you find the extra funds, Chun recommends placing them in an account that you can access whenever you need to without incurring any penalties.

"You need to be able to get the money out on a moment's notice. Certainly a tax-free savings account (TFSA) is a really good one to start with because anything and everything that earns interest inside of there you can withdraw tax-free," he says. "With a high-interest savings account, once you hit the TFSA limit, they become a very viable account as they're fully flexible and you're still earning, from an interest perspective, the most you can earn on liquid cash."

Other tips Chun recommends for Canadians to consider when setting up an emergency savings fund:

  • Avoid temptation: Your fund needs to be easily accessible if you need it but otherwise you should leave it untouched. If money tends to burn a hole through your pocket, talk to your bank about ways to avoid temptation, for instance, you could choose not to link this money to your debit card, so you don't have easy access to the funds.

  • If disaster strikes, rebuild: If you do find yourself in a situation where you need to rely on your savings, you'll probably develop a greater appreciation for the importance of being financially prepared. Let this be motivation to make rebuilding the fund a top priority, as soon as you are back on your feet.