Life is unpredictable. You might lose your job, suddenly need a new roof, a new vehicle or might just really need to take a vacation! When you’re living from paycheck to paycheck, there isn’t a lot of room in the budget to easily take care of those unpredictable expenses or to even treat yourself from time to time. That is what a rainy-day fund is for.

Paying for unexpected expenses with credit is a bad idea.

The average household debt continues to rise. Part of the problem is that people are using their credit as a rainy-day fund. When you suddenly need a new hot water tank or to pay an unexpected veterinary bill, it goes on the credit card. If you’re already in a tough financial situation and you’re racking up your credit and paying high interest, your situation will get worse. Having a rainy-day fund allows you to stay away from credit products that pile on debt.

How can I put money aside for a rainy-day fund?

Connect with an advisor. They can help set up a proper account that will best suit your needs and budget. The best type of account for a rainy-day fund is a Tax Free Savings Account (TFSA). You won’t have to pay taxes on that money, even when it’s withdrawn, and it can still be easily taken out without paying a penalty. You can also put money back into your TFSA account as you keep the accumulated contribution room. If you take money out of a Registered Retirement Savings Plan “RRSP” for a rainy day, you lose that contribution room forever and will incur some painful tax consequences.

ATB’s TFSA investment products can give your money an opportunity to grow and any income earned on that growth is not taxed. Every Canadian resident 18 years of age or older can put up to $5,500 each year into a TFSA. Learn more about an ATB Tax Free Savings Account.

Some people choose to put a portion of their rainy-day fund savings into a conservative investment, like a mutual fund or GIC, but typically you want that money to be readily available when you need it so be careful with GICs as they have different withdrawal features. But often a regular savings account​ that pays a little bit of interest is a suitable place to park your rainy day fund when you need it quickly.

How much do I need to have in my rainy-day fund?

A rule of thumb is to have 3 to 6 months of your typical household income in a rainy-day fund. That amount will ensure that you can cover your mortgage payment, utilities, minimal payments to your credit cards and other expenses, if you find yourself without regular income. Calculate your monthly expenses and make sure you can cover those for a few months with a little bit extra.

The best way to save for your rainy-day fund is to have preauthorized deposits going into your TFSA or other savings account each pay period. This way, you will get used to living without that money and your rainy-day fund can grow quickly. If you have more money accumulated in your rainy-day fund than you think you need, you can put the extra into your retirement savings plan, towards building other financial goals or to take that much needed holiday!

Getting started.

The best way to get started with a rainy-day fund is to speak with an ATB Financial Advisor in your community. They can give you professional advice and help you set up a TFSA or other savings account for your rainy-day fund. They can also help you determine how much you can contribute to that fund each month and how much you should have in there to cover expenses in the case of an emergency.