What would you do in a financial emergency? What steps would you take? Do you have a plan in place?
It turns out that nearly 4 out of 10 people don’t have even a basic plan for a financial emergency. In the latest Financial Planning Canada survey, nearly 40% of respondents said they do not have an emergency fund.
While that stat is pretty alarming, the good news is that 6 out of 10 people are saving for an emergency, but is that the only thing you can do?
Our plan includes multiple layers of protection if we were faced with a major financial emergency. There are four key things that we would do. These four things would allow us to cover basic expenses for 5+ years! How’s that for peace of mind!
This 5-year “safety net“ wasn’t something that we created overnight, but we’re thankful we now have a strong plan just in case the worst were to happen. We hope to never get to that point, but it’s nice knowing we have a solid plan that’s ready to go in case things get really, really tough.
Here are the four things we would do in a financial emergency…
Feeling financially secure has nothing to do with how much money you have or how much money you earn. Feeling financially secure is all about how you feel about your finances, how you manage your finances, and your attitude towards money in general.
Financial insecurity is a very common feeling. It affects both low-income and high-income households, it affects both young and old. In fact, according to the most recent FP Canada survey, at least half of us are affected by financial stress in some way.
“Half (50%) of Canadians say that financial stress has impacted their life in at least one way, with health issues (18%), marriage/relationship problems (15%), distractions and reduced productivity at work (14%), and family disputes (13%) the most common ways stress affects them.” Source.
When talking about financial security, it’s important to differentiate between BEING financially secure and actually FEELING financially secure. It’s possible to BE financially secure but not FEEL that way. It’s possible to be in a great financial position but without the right knowledge, routines and plans, it may not actually feel that way.
In this post we’ve outlined eight things you can do to FEEL financially secure (even if you still have the exact same income, spending, and savings).
Out of all the ‘best practices’ in personal finance, emergency funds are probably the simplest and most effective. There is nothing easier to set up and nothing that provides more peace of mind than an emergency fund.
Emergency funds are boring, they are simple, and they hopefully never get used.
The purpose behind an emergency fund is simple. An emergency fund should provide quick access to cash in the event of an emergency. An emergency should be something truly unexpected like a job loss, a health emergency, an unexpected repair, an accident etc. Using an emergency fund for an expected expense is NOT the right way to use an emergency fund (more on that later).
Emergency funds can also be called an ‘e-funds’, ‘rainy day’ funds, or ‘oh $h!t’ funds. Whatever you call it, the purpose is the same, to help ease the financial burden during an emergency.
Yet, as simple as emergency funds are, they sometimes get used incorrectly. In this post we explore what an emergency fund is, how to set one up, how large it should be, and what NOT to do with an emergency fund.
Whether it’s a torrent or a trickle, having a system to manage cash flow can help make money easy. One of the most time-consuming things about personal finances is managing income and spending. But what if you had a budgeting system that helped you manage that monthly cash flow? And what if that system was free, easy to set up, and simple to maintain?
Managing income and spending is the best way to achieve financial freedom. It doesn’t take much to go from financial ruin to financial success. It can be as little as $10 per day. It’s not about stellar investment returns, or risky real estate investing, or earning six figure salary, it’s all about paying attention to income and spending.
But old methods of managing cash flow need to be updated for the digital age. Cash is less prevalent, and credit and debit transactions dominate. Any system for managing income and spending needs to be digital, automated, and easy to set up and maintain.
The envelope budget is a classic way to manage income and spending. It’s a proven way to manage cash flow and it’s easy to understand. Money gets allocated to certain envelopes and spent during the month. As money in an envelope gets low this provides a signal to slow down on spending until the envelope gets replenished on the next payday.
Thanks to no-fee online bank accounts, the envelope budget can be easily adapted to the digital age.
But it’s not as simple as just creating a few new bank accounts. To manage cash flow with the digital envelope budget system it helps if you have a budget already created. This may require tracking your spending for a few weeks or months. Or it may require looking at past statements. It also requires an online no-fee bank account.
This is how you set up the digital envelope budget system.
They say the best time to plant a tree was 20-years ago but the second best time is now.
The same goes for financial planning. The best time to build a plan is before a crisis/recession/depression but the second best time is today. A good financial plan will help ensure that you’re prepared for a recession or financial emergency.
Having a financial plan provides an incredible amount of peace of mind. A good financial plan will already have anticipated a scenario like this and will ensure you’re still successful. It will highlight how to prepare for a recession and what changes you need to make to ensure you are successful over the long-term.
There are a few best practices that can help improve the ‘robustness’ of a financial plan. These are practices you can start using right away, even if they weren’t previously part of your plan.
Some of these best practices focus on behavior. They help manage your financial routine during emotional periods like this. Some focus on flexibility. They ensure that you have room in your plan to absorb the unexpected, whether that be changes in income, changes in expenses, or changes in investment returns.
It doesn’t matter if you’re in retirement, starting a family, or just starting to save and invest, there are a number of ways that you can prepare for a recession that will help you feel better about your finances and your long-term plan.
This post will touch on many of these best practices. These are best practices that we’ve covered in previous posts, so we’ll cover the basics here and link to past posts for more detail.
Low risk investments are an important part of every financial plan. There are certain reasons we want to use low risk investments in a plan and there are different types of low risk investments that we may want to consider.
Often we can become too focused on increasing investment return to appreciate the usefulness of a low risk investment. When used appropriately, a low risk investment provides an important source of funds in an emergency, or provides less volatility in our investment portfolio, or provides a psychological advantage that may help us avoid making a behavioural mistake during a downturn.
There are a few places that low risk investments will show up in a typical financial plan. If you haven’t considered these uses for low risk investments then it might be time to get a second opinion on your financial plan…
1. Emergency fund
2. Saving for infrequent expenses
3. Saving for a down payment (Or other short term financial goal)
4. Fixed income portion of an investment portfolio
These are some of the typical uses for low risk investments but what are some good low risk investments to use and which of these uses would they be appropriate for?