Canadians not geared for life’s curveballs

By Vikram Barhat | March 26, 2012 | Last updated on March 26, 2012
2 min read

Murphy’s Law says anything that can go wrong, will go wrong. Yet many Canadians aren’t heeding this warning when it comes to their finances.

The 2012 TD Canada Trust Report on Savings reveals 38% of Canadians have no money set aside to cover job loss, significant medical bills, out-of-the-blue home repairs or life’s other surprises.

Moreover, 53% of those polled admitted they’ve had to draw down their cash savings to navigate an unexpected life event. Of those who didn’t have an emergency fund, 49% had to depend on friends or family, 36% used credit cards, 35% relied on a loan or line of credit, 16% dipped into their savings account and 14% into their RRSP. Only 26% of the participants said they had a contingency fund set up.

“You can’t prepare for everything, but you can prepare your finances,” says Raymond Chun, senior vice president, TD Canada Trust. “It’s concerning that so many people are relying on credit cards and lines of credit, instead of cash, as their financial cushion. It’s important that you set aside cash in a savings account for unexpected expenses to help you in situations, good and bad.”

While they understand the importance of an emergency fund, Canadians cite a variety of reasons for not having one: they’re broke (56%), paying off debts from credit cards or lines of credit (46%), servicing their mortgage (14%), or saving for retirement or their child’s education (7%). Another 3% don’t think a savings fund for unexpected expenses is necessary.

Chun says the savings factor cannot be neglected. “It can be tough to balance all of your financial obligations, but this is precisely why it’s important to set up a cash savings fund for life’s surprises,” he said. “Without one, it is tough to find a way to cover unexpected costs, and if you decide to borrow money, paying back the money plus interest will be another monthly cost for you to worry about.”

The good news is one-third of Canadians have one to three months of living expenses saved, 13% of Canadians have four to six months saved, and 16% have more than six months of living expenses in the bank.

“[Clients] should aim to set aside three to six months of essential expenses,” Chun said, suggesting they use their tax returns to kick-start the fund.

An effective way to sock away funds is to set up an automatic transfer from each paycheque to a liquid yet relatively inaccessible account (a separate high-yield savings account or a short-term GIC, for instance). All the better if the account can earn interest tax-free in a TFSA.

Chun also advises Canadians to resist the temptation to link this account to their debit cards.

Finally, when a life event necessitates drawing down savings, clients should make rebuilding the fund top priority as soon life is back to normal, he added.

Vikram Barhat