Life is full of surprises, and not all of them are pleasant, we could probably hold an online discussion that would run into hundreds of hours about the surprises we’ve all faced. Think of your Safety Net Fund—or maybe you prefer to call it a Peace-of-Mind Fund, Rainy Day Reserve, Cushion Fund, or plain old Emergency Fund—as your financial catcher’s mitt, ready to catch life’s always expensive issues. Whether it’s an unexpected car repair, a sudden job loss, or an urgent veterinary bill, having a fund in place ensures you’re prepared without resorting to high-interest debt like credit cards or lines of credit. That’s where your Safety Net Fund comes in.
After a divorce left me broke and constantly stressed about money, the one thing that kept coming up in all the finance books I read (yes, I’m that person), was that you have to start with an emergency fund. Although as you can see, I prefer Safety Net Fund, because I like the financially safe and secure feeling it gives me.
This fund is money you’ve set aside specifically for those “just in case” moments. Without one, you might find yourself relying on credit cards or loans with high interest attached, which can quickly lead to a cycle of debt. This spiral is a common cause of financial stress and hardship, making it even more challenging to regain control of your finances. So, let’s not go there okay?
Think about emergencies that you’ve had to deal with over the last few years, did any of these emergencies disrupt your life?
– Car Repairs: Your vehicle suddenly breaks down, requiring costly repairs—that’s a yes from me.
– Medical Emergencies: Unexpected medical bills that aren’t fully covered by insurance—that was a nice $9.5K bill this year, just on teeth!
– Job Loss: A sudden layoff can leave you without income for an extended period—fingers crossed this hasn’t happened in our household, but it is a reality that could happen.
– Home Repairs: Your roof springs a leak, or your furnace breaks down in the middle of winter—Yup, these both happened to us in the last 11 months.
These are just a few examples of situations where a Safety Net Fund can save the day. But it’s essential to understand when ‘not’ to dip into these savings. For instance, a night out, a new gadget, or a non-essential purchase should be funded from your discretionary income—not your emergency savings.
When I started my financial journey in 2012 (you know, after the divorce), I didn’t have a Safety Net Fund. I had a low income and high expenses in comparison as I came out of a divorce. I knew I needed a Safety Net Fund and so I wrangled my meagre budget and found $50 per pay that I started my fund with. I opened a separate savings account and named it Emergency Fund—although I now prefer Safety Net Fund, so might change it—where it wasn’t easy to dip into without going into my online banking to access it. As my salary increased, I was able to increase the amount saved into the fund with each payroll deposit.
So, how much should you save? The general rule of thumb is to aim for 3 to 6 months’ worth of living expenses. This might sound daunting, but it’s essential to remember that you don’t need to achieve this overnight. Start small like I did and build gradually. And remember to replace it when you’ve had to dip in. Here are some variables about where to get started with your own Safety Net Fund:
- Just Starting Out? Aim for $1,000 as a starter goal. This amount can cover most minor emergencies, like a car repair or a small medical bill.
- Stable Job and Lower Expenses? Three months of expenses might be sufficient to tide you over in case of job loss or other disruptions.
- Variable Income or Dependents? Lean toward six months or more, especially if your income fluctuates or you have family members relying on you.
Everyone’s life and situation are different so you should figure out how much you need by working out your monthly expenses and how much you would need if you were to lose your main source of income.
Here are some specific ways to start small with your Safety Net Fund. Building your fund from scratch can seem overwhelming, but starting small can make the task more manageable. Here are some practical steps to get started:
- Round Up Your Purchases: Many banks offer programs that round up your debit card purchases to the nearest dollar and transfer the difference to your savings. Over time, these small amounts add up.
- Cut a Small Expense: Identify one small expense you can live without—a daily coffee, or a subscription service—and redirect that money into your fund.
- Use Spare Change: Apps like Digit, Acorns, or Qapital in the U.S. or Koho, Moka, or WealthSimple in Canada, can help you save spare change from everyday purchases, rounding up transactions and investing the difference in your fund.
- Sell Unused Items: Go through your home and sell items you no longer need or use. The money earned can go directly into your savings.
Be creative and think of ways you can get started, because that is the most important thing, getting started. Once you’ve set up your Safety Net Fund, it’s time to nurture it. Consistency is key:
- Automate Your Savings: Set up automatic transfers to your Safety Net Fund every payday, so you don’t even have to think about it. This method ensures that your savings grow steadily without relying on your discipline.
- Use Windfalls Wisely: If you receive a tax refund, work bonus, or any unexpected windfall—lucky you! — consider putting a portion, or all, into your Safety Net Fund.
- Review and Adjust: Periodically check in on your fund. Life changes, like a new job, a new home, or new family members, may require you to adjust your savings goal.
Where Should You Keep It?
Your Safety Net Fund needs to be both easily accessible and safe from market risks. This isn’t the place for stocks or risky investments. Here are a couple of safe places to keep your money:
- High-Interest Savings Accounts: These accounts offer decent interest rates while keeping your money safe and accessible. They’re a solid option for your emergency fund.
- Guaranteed Income Certificate (GIC): In Canada, as the name suggests, it guarantees a specific return over a fixed period, e.g. 6 or 12 months.
- Tax-Free Savings Accounts (TFSAs) or Roth IRAs: In Canada, TFSAs and in the U.S. Roth IRAs, are excellent for growing your savings tax-free, with the added benefit of easy access when needed. But check the government restrictions, and isn’t it a shame if you have to pull from your retirement funds for an emergency? This should be the last option!
One of the most critical aspects of maintaining a successful Safety Net Fund is the discipline to use it only for genuine emergencies. It can be tempting to dip into it for non-essential expenses, but this can undermine your efforts. The key is to remember the purpose of your fund—security and peace of mind in the face of unforeseen events.
Also, consider having a House Fund to help with unexpected housing costs, have this on top of your Safety Net Fund so that you’re always budgeted for house upkeep. Owning a home is expensive so try to be prepared. If you’re renting, make sure you have renters insurance and a good relationship with your landlord!
Once you’ve reached your savings goal—whether it’s three, six, or more months of expenses—the next steps are to focus on paying off long-term debts and starting to invest for the future. Your Safety Net Fund is just the first step in building a robust and resilient financial life.
By taking these steps, you’re not just setting aside money—you’re building a safety net that offers you the peace of mind to navigate life’s unexpected challenges without financial strain. Good luck!