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How to Build an Emergency Fund

10/21/2014 05:47 EDT | Updated 12/21/2014 05:59 EST
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I never cared for the phrase: "saving for a rainy day." What exactly is a "rainy day?" It's some kind of far-off, hazy problem that is perpetually on the horizon but never in front of us. Sure, you might put some cash away, here and there, but it's easy to neglect this concept. And besides, a lot of us have too many things to worry about in the here-and-now to care about tomorrow.

Unfortunately, a recent study commissioned by TD Insurance confirms this mentality, and the implications could wreak havoc in the lives of Canadians.

The survey points out that 39 per cent of Canadians surveyed have no idea how they would pay for their expenses if they had no income for six months -- and the number swells to 44 per cent for those under the age of 35.

The same report found nearly 70 per cent of respondents say they have "some" or "a lot" of debt, and of those with the most debt, 60 per cent have no financial plan in place in the event of sudden illness.

This is a tremendous roll of the dice. Illness is nearly impossible to predict, but statistics do show that half of all men and one third of women will suffer a critical illness before age 65. Medical technology means that more and more of these people will make full recoveries, but the fact remains that the odds of some of us getting seriously ill are the same odds as landing heads or tails after flipping a coin.

Suddenly, the "rainy day" sounds more like a downpour than a light drizzle.

Here are five easy steps you can take to start building up an emergency fund:

• Set a goal -- The TD Insurance survey said Canadians would need an average of $45,609 in savings if they could not work for a year. It might be a better idea to start with a smaller goal, like $1000 in a savings account. Then try to build it so that it'll cover a couple months' expenses, then keep going. Treat it like a bill and make monthly payments.

• Sell something -- Have a look around your house for some valuable items that you never use. If you have no intention of dusting off that treadmill, you could sell it for a quick influx of cash that could go straight to your savings account. Selling off old impulse purchases can help jump-start your savings initiatives.

• Know what it's for -- Nothing kills your emergency fund quite like misuse. Pay close attention to the term emergency. Does a winter vacation constitute an emergency? How about a big-screen TV or a fancy meal? If -- or maybe we should be saying when -- you find yourself in a true emergency, you'll be glad you had the restraint to save.

• Know where to stash it -- Keeping "emergency money" in your chequing account will leave your cash in the line of fire and increase the odds that you'll spend it. I don't recommend stuffing it in your mattress either. Do some research and find a savings account that works for you, such as a tax-free savings account (TFSA), which will let you keep any interest you might accrue, tax-free.

• If you can't get ahead, get help -- It's hard to put money aside when a big chunk of your income goes towards loan payments. In order to get ahead, you need to stop falling behind. Speak to a financial advisor or a non-profit credit counselling service for the professional help that you might need to take care of your debts.

Hopefully you'll find that taking some time today, to focus on tomorrow, will allow you to breathe a little easier. Securing your financial future is an important part of every household budget.

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