In my last blog I mentioned that as part of your new financial plan, after buying your home, you should make sure that you have an emergency account with at least 12 months of your monthly expenses.
I really got a few of you charged up and you did let me know how impossible that was, it was not realistic, I was way out especially since you just bought your first home, who am I kidding and you just went on and on.
Well first of all, Rome was not built in a day, but it was destroyed in one. They had the great fire and Nero was playing his fiddle. Well what I am trying to prepare you for is that when your fire is burning you need access to a hydrant that is not plugged with the debris of debt but lots of water flowing in the form of your own hard cash.
I was wrong to just say to you, that your emergency account should have X amount of dollars without giving you some examples of how to do that.
It is a great challenge, when you have just moved into a home with the type of expenses we talked about in the last blog to be able to save for such a large emergency account.
Many banks have savings accounts which you could use as an emergency account. One of the features of these accounts is one or two free withdrawals a month which can be handy when you need to access the funds for an emergency. Another account that can be used as an emergency account is the Tax Free Savings Account-any of these could be used for your emergency account.
My intention was not to expect you to save $25,200 in one year. My intention was to make you aware that you need to focus on saving for those emergencies or just household repairs. The idea is to have a goal which you can set with your planner or on your own. You know what the magic number is for you- it is the total of your monthly expenses. Not your sister’s or friend’s but for you and your household. The amount is 12 times your monthly expenses. In order to plan for your emergency account you must know the total amount in dollars. Once you have set this in place you can then begin to see where in your spending plan you can make the changes or adjustments which will allow you to put this amount aside in a gradual manner.
Let’s look at Curtis’s comment:
Enlighten me – I quote from your blog“If your total monthly expense is 2,100.00 that mean you need to save $25,200 in your emergency account.”
“What would u consider as a reasonable amount of time to build up this account? One year, Two years, – how long. Bearing in mind all of the other bills banging away at yours truly for attention, to be paid, from the frivolous, to the mundane to the necessities.Some frivolity is required in one’s life, at judicious moments I hope.”
A reasonable time for one person or family would not be the same as another. Completing an emergency account is a must but not to the detriment of your other bills whether they are frivolous, mundane or necessities. These bills must be attended to and always on time.
Part of your new spending plan should include an emergency savings plan. For some of you it might take you 1 year while for others it can be anywhere from 2 to 5 years. Remember $2,100 a month in regular household expenses is on the low to medium. We are going to use this number and work on attaining the $25,200 over five years, most of you are receiving your pay cheque every two weeks or you have 26 pay periods in one year. Over a five year period you have 130 pay periods to get the proper amount. To save each pay day divide $25,200 by 130 or what ever your number, that will give you the amount you need to automatically save each and every pay day, in this case $194.85. This is over five years, but I am hoping that when you made the decision to purchase your home you followed my advice and paid off your revolving debt. Without hundreds of dollars of revolving debt to pay of each month you should be able to accumulate your emergency account in a reasonable amount of time.
When preparing your spending plan whether you have just bought your home or rent it must always include some room for what you might consider frivolity. This could be your annual vacation, or a few weekends away. As always proper, planning prevents poor performance and a smart spending plan should be prepared in such a way to allow you to move freely without feeling constrained.
I hope this helps you in formulating an emergency account, and you have come to realize it will take some time to accumulate the funds in the account.
ROME WAS NOT BUILT IN A DAY. Go according to your plan.
Tessa- Marie Shillingford is the author of Controlling the Debt Monster. She is Personal Financial Planner, with a designation from the Institute of Canadian Bankers, and a Financial Counselor certified by the institute of Canadian Banker. She is presently a Program Facilitator of Financial Literacy at JVS Toronto. Tessa- Marie was employed by TD Canada Trust for twenty years in the retail section of the bank. During her tenure at TD Canada Trust she held various positions interacting with customers of the bank. As a Financial Advisor and Manager of Financial Services she led a group of Financial Advisors in helping customers of TD Canada Trust successfully manage their finances. Details of her book… Controlling the Debt Monster, can be found at http://www.controldebtmonster.com