How Canadians can start an emergency fund on a tight budget

If you’re living from paycheque to paycheque or are in over your head on your monthly expenses, trying to save money or start an emergency fund can feel like filling a bucket with a hole in the bottom.

However, creating an emergency fund is a very important step towards achieving overall financial well-being, as it will provide a safety net for unexpected emergencies like car or home repairs, medical-related costs, or job loss.

Below, I’ll walk you through some practical steps to help you get a grip on your current financial situation so you can start setting aside money for your emergency savings.

Getting a grip on your current financial situation

An old mentor of mine once told me that you have to realize you have a problem before you can even hope to solve it.

This is especially true when it comes to solving financial issues and saving money.

Living from cheque to cheque can be stressful. Sure, you may have enough to cover the bills at the end of the month, but there’s nothing left over to cover the unexpected. If one unplanned car or home repair comes up, if you get sick and miss one week of work, you’ll be in the hole.

This is why it’s so important to create emergency savings for yourself. It’s the safety net that will catch you when the unexpected happens.

How to start saving on a tight budget

A recent report from the Healthcare of Ontario Pension Plan (HOOPP) revealed some harsh statistics about Canadians’ savings:

• 51% of Canadians under 35 are living beyond their means
• 44% of non-retired Canadians between 55 and 64 have less than $5,000 saved

To be fair, the recent pandemic and high levels of inflation have given all of us a roller coaster ride over the past few years. However, it’s important to start somewhere.

Here are five steps to take if you want to start an emergency savings fund moving into the new year.

Step 1: Identify areas where you can spend less

The first step in creating your emergency fund is to scrutinize your spending. Sift through your monthly expenses and pinpoint areas where you can trim the excess.

Are there subscription services you barely use?

Can dining out be swapped with more home-cooked meals?

Even small adjustments, like opting for generic brands or cutting back on that daily Starbucks run, can free up cash. It’s about being mindful of where each dollar goes.

Step 2: Make a savings contract with yourself

One of the best ways to start saving is to make a promise to your future self. What better way to uphold it than by creating a savings contract?

Draft a simple agreement that outlines your savings goals, the amount you aim to set aside regularly, and the specific purpose of the fund. This contract acts as a tangible reminder of your commitment, making it harder to backslide into old spending habits.

Sign it, date it, and place it somewhere visible. It’s a psychological trick that will help you turn an intention into a concrete plan of action.

Step 3: Use a savings app to “round up” purchases

Utilize a savings app that rounds up your purchases to the nearest dollar and deposits the difference into your emergency fund. This is a painless and almost invisible way to save.

For instance, if you spend $3.50 on a coffee, the app rounds it up to $4, and the 50-cent difference goes to your savings.

Moke and Wealthsimple are two apps that facilitate this. All you have to do is link your card, and your change will be automatically rounded up every time you make a purchase with that card.

Over time, these small amounts can accumulate significantly. This method is perfect for those who find traditional saving methods daunting. It’s seamless, effortless, and integrates smoothly into your daily spending routine.

Step 4: Set aside a set percentage of each paycheque

Many banks allow customers to create automated savings plans that will take a percentage or set dollar amount from each direct deposit or paycheque and put it into a separate savings account.

This goes hand in hand with the steps I mentioned above. Ultimately, the best way to start saving money is to automate it, so you never have to think about it. One day, you’ll check your emergency savings fund and realize you have hundreds (or even thousands) saved up!

Step 5: Start a side hustle specifically for savings

Another intentional step you can take that can take your savings to the next level is to start a side hustle with the specific intention of using it for savings. Consider signing up for rideshare or delivery apps like Uber, Lyft, SkipTheDishes, DoorDash, or Instacart.

You could also use technical skills like photography, social media marketing, web design, or graphic design to earn extra money on the side. You can sign up for freelance websites like Upwork, Freelancer, or Fiverr to start taking on jobs from clients around the world.

Alternatively, you could create a simple business card or website and begin advertising to local clients.

Do these jobs in your spare time, after work, or on your day off, and dedicate the extra money to your emergency savings.

Pro tip: use a TFSA or HISA for your emergency savings

If you’re going to start an emergency savings fund, I caution against using a traditional savings account. Here, your money will sit around, losing value over time, as most banks pay negligible interest on traditional savings.

Instead, put your savings into a special high-interest savings account (offered by many online banks and credit unions) where it can earn 2-5% interest. Alternatively, consider putting the money into a Tax-Free Savings Account (TFSA), where it can be invested and grow with compounding interest.

Set rules for your emergency savings fund

Last but not least, you need to set strict rules for your emergency savings fund. Clearly define what it’s to be used for, and what it’s not to be used for. This will prevent you from withdrawing from it unless absolutely necessary.

Saving on your grocery bill is another way to start setting extra money aside for your emergency fund. Keep on reading to see the best tips to cut your grocery bill down!