Debt-Free Forever by Gail Vaz-Oxlade (the beginning after the end read novel .TXT) 📕

income you’d also have all the costs associated with getting treatment. I’ve heard from more than a few people who, having been diagnosed with something fixable, are buried in debt by the time they’re back to work.

GAIL’S TIPS

If you think a line of credit is an acceptable form of emergency fund, then answer me this: once your emergency is over, and you’re tens of thousands into your line of credit, how will you cope with that emergency? A line of credit is NOT an emergency fund, and anyone who tells you to get a line of credit for emergencies is a big dope, so don’t listen. Cash in the bank is an emergency fund, no ifs, ands, or buts.

STEP 1: FIGURE OUT YOUR ESSENTIAL EXPENSES

If the amount you need to save seems too daunting to even think about, I recommend you figure out what your essential expenses are and cover your butt on those one at a time. Your essential expenses are those things that keep body and soul together: rent or mortgage payments and taxes, car payments unless you’re prepared to part with your car, minimum payments on debt, food, basic medical costs, and perhaps child care if giving up your spot means you’ll never get it back. By knowing what your most basic needs are, you know the minimum amount you need to get by. Then you can get busy accumulating the money you may need to cover those costs.

If you are a two-income family, begin by setting aside the amount it would take to stay on an even keel if the higher income went away. So if the lower income would cover 40% of your essential expenses, at the very least you need to save up the other 60%, while you pray that you don’t both lose your jobs at the same time. If there is any likelihood that you may both become unemployed at the same time for whatever reason—you both work for the same company or in the same industry, you both have unstable jobs, you both have had bad performance reviews—your buffer must be bigger.

GAIL’S TIPS

An emergency fund can help you smooth out your budgeting because when unexpected expenses hit your doorstep, you don’t have to constantly be rejigging your budget to make it to the end of the month. You can use some of your emergency fund for the emergency and keep your budget on track (as Long as you replace the emergency money quick, quick Like a bunny).

When you’re building your emergency fund, take into account any income you may receive from employment insurance (if you’ve suffered a job loss) or short- or long-term disability insurance (if you’re unable to work due to illness) in your calculation. So, if you would need $5,000 a month to cover your essential emergency expenses, and your disability insurance would provide you with a net income of $2,600, you need to cover the difference with your emergency fund.

STEP 2: SET UP AN ACCOUNT

To create your emergency fund, set up an automatic deduction from your regular account to a high-interest savings account. Don’t settle for some pathetic savings account being touted as an “investment account” from your local bank. You work hard for your money, and your money should work just as hard for you. As for keeping your emergency funds liquid, you must. If you need money, that’s not the time to discover that the markets are down and half your emergency fund has evaporated. In the case of an emergency fund, safety is everything.

The Tax Free Savings Account (TFSA) is perfect for emergency funds. Isn’t it nice when a new product comes along that is the Bestest Idea Ever? The TFSA is just such a dream come true, and it’s a perfect vehicle for saving up money to cover your essential emergency expenses.

The TFSA is available to Canadian residents 18 and older and can be used to save up to $5,000 every year. You can have as many TFSAs as you wish, but the $5,000 contribution limit applies across all accounts. While the contributions aren’t tax deductible, all the income earned in a TFSA is tax-free.

GAIL’S TIPS

Watch the fees Levied by some financial institutions offering the TFSA. Don’t be so blinded by the tax-free aspect that you buy your TFSA from a provider who gouges you with administration and withdrawal fees. They’ll try. It’s up to you to make sure they don’t succeed.

If you can’t save $5,000 this year, don’t sweat it. Your contribution room can be carried forward to future years. So if you can only come up with $2,000 this year, next year your limit will be $8,000 ($5,000 for next year and $3,000 carried forward from this year). And since those limits are going to be indexed to inflation in $500 increments, watch for increases in limits over time.

The bestest thing about the TFSA is its flexibility. You can take money out of your TFSA at any time for any purpose without losing the contribution room permanently. If you do withdraw money from your TFSA, you’ll be able to put that money back the following year—yes, you’ll have to wait until then—without affecting that year’s $5,000 contribution limit. That flexibility makes the TFSA the number-one choice for socking away an emergency fund.

STEP 3: START SMALL-BUT START NOW!

If you don’t have much to save, it doesn’t matter—the important thing is just to start. Even if it’s only $20 per pay, start. Aim to have $500 in the bank. Then aim for $1,000. As long as you haven’t started, you’re at risk. Once you’ve started, you’re on your way and then it only becomes a matter of how to boost the amount you’re setting aside.

If you’re spending $8 a day on lunch at work, and another $5 on coffee, that’s $13 a day. Brown-bagging it can save you $10 a day, which is a whopping $2,400 a year for your emergency fund.