WELLINGTON COUNTY – Building a financial safety net is arguably one of the most crucial steps in securing one’s financial future. Life is unpredictable and having a solid emergency savings fund can provide a buffer against the unexpected expenses of life – whether its sudden job loss, an unforeseen vet visit, or a major home or vehicle repair.
“People use it (a financial safety net) in a couple of different forms,” said Manulife Wealth senior financial advisor Daniel Allen. “There are people who will refer to having enough room on their line of credit to pick up the pieces … for a number of people that are really happy to have all their debt paid off, it’s having enough money in a savings account to do something similar.”
Allen says when building a financial safety net or an emergency savings fund it’s important to tailor it to your own comfort level.
“There’s a lot of talk about having a couple of months’ worth of income, sitting in a savings account to do that. But to be honest, there’s no real firm number there, it’s just a case of comfort level,” said Allen. “I have clients that would say, Well, I’m only comfortable if I’ve got $10,000 in my savings account or my checking account in case of emergency and that’s fine, too, because some of this stuff is more peace of mind than it is anything else.”
When setting up and building your emergency savings fund Allen says it’s important to set up an automatic system, this way you will be less tempted to spend the money.
“You have to set up something that’s automatic,” said Allen, explaining that transfering even a small amount to savings the same day you get your pay cheque can be a helpful process. “It goes to an account that you can kind of forget about. It’s an out of sight, out of mind, kind of savings process…
“Once you’ve got that established, then every time you get a raise or a bonus, you look at it from the standpoint of, so I’ve got some life I have to pay for over here, but I’m going to take half of that raise or half of that bonus, and I’m going to put it into savings,” he added.
“When you’re young, and you get into that habit of doing that, you get a couple of things going on. One is, you’re not putting every spare dime you have, away in savings. You’re allowing your spending to go up a little bit too. So you’re kind of happy about that stuff. It doesn’t mean it’s like slavery to your savings plan. But on the other hand, you’re also boosting it up every time you’ve got an opportunity to do that.”
Allen told the Advertiser while putting money away is certainly a necessity, a mistake most people make is actually living beyond their means, especially when it comes to housing.
“I think people overreach on the real estate side, and they don’t give themselves enough room for either emergencies or the price of things going up,” said Allen.
“What happens is they reach too far for the more expensive house, let’s say, or the nicer place to rent, which is all very nice, but when you made that commitment every month, and it doesn’t leave you enough money to make up other plans or doesn’t work well for your long term financial well-being, or your kids financial well-being, that’s probably the biggest mistake that I see people make out there.”
In terms of where you should house your emergency savings, Allen recommends a good high interest savings account.
“Every financial institution has their own version of a high interest savings account …. and in almost every case, you’re getting higher than what you would expect for a savings account, but very low service charge. So, it’s not going to cost you a lot of money to have it there, and it’s easy to get at,” he said.
An emergency savings fund or a safety net, is something that people from all walks of life can work towards and achieve, without the help of a financial advisor. However, for those wanting a fresh set of eyes to look at their expenses Allen says that a financial advisor could be beneficial.
“The benefit of a financial advisor is a second or third set of eyes. Yeah, so in cases where I’ve done Cash Flow Planning with clients, that second set of eyes where, you know, somebody comes in and let’s say it’s their cable bill or their internet bill, whatever they’re paying subscriptions for different, you know, television programs or whatever on that. You know, as financial advisors, we often get to see a lot of different things out there, and we can bring that wisdom to that person’s specific situation,” said Allen.
“So, if I’m looking at a young person that’s spending $200 a month on Netflix and everything else that you can sign up for, and you can help them pull that back to $100 a month, and then it helps their savings plan that way. But sometimes that’s not easy to do unless it’s a different set of eyes looking at your circumstance. We all kind of grow into our own circumstance, so it seems normal to us, and you almost need a second set of eyes to know what’s not normal.”
