I’ve made my fair share of basic money mistakes, from paying over $50 a month in bank fees to waiting way, way too long to invest my long-term savings in the stock market, but today’s is a doozy.
I’m going to give you guys a crash course in how I set up my emergency fund, which – spoiler alert – is a textbook example of what not to do.
You too can do emergency funds all wrong, in just two easy steps!
Step 1: Give yourself legitimate reasons to withdraw money from your emergency fund – frequently.
When I got my first real job out of university, I went straight to the bank and opened up a TFSA and an RRSP, and proceeded to funnel 10% of my paltry entry-level salary into each account. Which is great, right? Good job me, being so disciplined!
However.
Luckily, these are the only kind of shoes I’ll spend more than $50 on.
I knew that keeping up that level of savings would mean I’d need to save up for any big purchases I saw in my future. Things like Christmas presents for my family, or new running shoes, do not just “happen” on 80% of an entry-level salary if you still want to do fun things like eat and pay rent.
At the same time, I knew that I should really save up an emergency fund, ideally to cover a few month’s expenses.
So instead of saving a bit towards my emergency fund, and a bit towards big purchases, I bet you can guess what I did next.
That’s right.
I used my emergency fund savings as my big purchase savings, and vice versa. All in the exact same account.
Now sure, you’re probably thinking, you made that mistake as a new grad. Now that you’re a learned adult, you’ve changed your ways. Right?
Step 2: Keep doing this for years.
Italy: great views, not cheap. I think that’s in the handbook.
It’s been over three years that I’ve had this stellar* system going. On one hand, I have never carried a credit card balance, and this account has seen me through a mom-sponsored trip to Italy, several pairs of running shoes, a layoff and The Dog making his grand entrance into my life (and my bank accounts.)
On the other hand, it’s never managed to maintain a balance much above $2000. That’s a very solid month of expenses for me, but not more. Some emergency fund, right?
*not stellar.
Editor’s note: With the benefit of time and ~experience~, I want to note that I was way harsh on myself in this article when I wrote it a few years ago! Yes, I needed to change my behaviour because I wanted to save up more money, but my emergency fund was pretty much the best I could do at the time, and I did it. That’s really all you can ask of yourself as you’re starting on your financial journey—and hey, my emergency fund still kept me out of credit card debt. That’s a big win.
Step 3: Realize the error of your ways.
This one, I would probably advise doing. I think it’s going to work out well for me.
Last Tuesday, I sat down and opened a new savings account with Tangerine labelled exclusively “Emergency Fund.” This marks the end of the “Short-Term Savings” era, which is the ultra-generic account name I had been using previously.
I also opened an account for “Big Home Purchases,” since my poor 15-year-old double bed is looking a little worse for wear, and a new mattress is probably in my future. Since purchases like these are (big win!) no longer coming out of my “Short Term Savings” account, I’m starting from scratch and treating it like the separate savings goal that it is.
To add to my plethora of savings accounts (they’re free, I’m allowed) I also added a “Vacation and Gifts” account too. Since I already have an emergency savings account started for The Dog, because he’s a accident-prone butt and I love him, I’ve now taken care of the only other real reasons I had to raid my emergency savings in the first place.
Step 4: Be patient. It’s a process.
Ok, that makes two steps in a four step process of how NOT to do something that I would really recommend.
If you’re writing a textbook, this is probably not the textbook example you want to use.
Because these accounts are all separated now, I’m going to miss seeing the balance going up in leaps and bounds every month. (Little leaps and tiny bounds, but still.) That’s what happens when all of your savings goals are under one account-roof – the balance goes up quickly. On the other hand, it goes down just as quickly when you need it for something.
Now, each individual account is on the slow-and-steady path to achieving the different goals they’re each there to serve. They might not grow quite as quickly, but the ones that are meant to stay put also won’t go down every time I pull out an unrelated expense.
That emergency savings account, for the first time ever, is not about to be raided in anything short of an emergency situation.
Did you start off with an emergency fund account dedicated solely to emergencies? Or did you – like me! – take the, ahem, “scenic” route to getting there?
I have a very similar system to the one you’ve now set up, but with two savings account an a few Excel spreadsheets. One I ant emergency fund and the other is for expenses I know are coming, like car insurance, Christmas, vet exams, and such. I LOVE it. I did what you first described for quite a while, and what I’ve noticed now (besides that I save more money… Though not as much as I had hoped) is that I feel so much less guilty when paying the expenses that aren’t in my monthly budget, just aren’t emergencies. Now that they are planned and saved for, it’s suuuuch a relief.
I love that you have so many accounts 🙂 it will be awesome!
I’m really looking forward to that too – the “Oh, this account is actually for this purchase, so there’s no guilt involved!” thing. It’s going to be sooooo good! Kudos to you for being on top of that, and thank you for sharing your experience with it – it’s so great to get other people’s perspectives on it!
I’ve always treated my savings account as a black box full of piranhas where I should never stick my hands unless the world is coming to an end…in which case I won’t miss my hands anyway. This mentality has allowed me to amass quite a bit there and now I can focus on investment and hopefully getting to FI. I do wish I’d been more proactive in my 20s about investments, so I’m glad you’re starting early; big kudos to you! 🙂
This is, hands down, the BEST description of how to treat savings I have ever heard. I am dying laughing – “in which case I won’t miss my hands anyway.” Thank you so much for the kudos! It’s definitely been a learning experience over the past few months (and spoiler alert, from my tracking-expenses challenge, I can tell it’ll take me at least a few months to actually hit that half-saved target!) I’m so glad I got started when I did. Congrats on being on the FI path – that’s so impressive!
Scenic route for sure. I have saved up my ’emergency fund’ to a few thousand $ seeeveral times, and withdrew it all at some point or another. Back to saving it up again.
Good for you for saving it back up every time though! And there’s something to be said for the scenic route – I’m pretty sure if someone had told my new-grad self that *actually*, I should be saving in X number of accounts for all these different equally important goals, I would have either punched them or started to cry, haha. Due to a huge helping of luck, my “short-term savings” account never ran dry, and I’m glad I realized what was probably a better system in time.
It’s great you’ve seen the error of your ways, but honestly, I just think it’s impressive that you never had credit card debt. In my first few years out of college, I had tiny savings that I raided repeatedly AND some serious debt, and knew that was true for most of my friends. So give yourself a pat on the back for that, and for now being more intentional about your savings! 🙂
Thank you so much! Honestly, I feel like no matter which way it goes, being a new grad is just hard with money, haha. It’s something I’m definitely going to write about, because the downside of the “not having credit card debt” was the “constantly feeling like I was never going to be able to afford anything, ever.” I was *so* conscious of how much money I had to spend, that even the suggestion of (really awesome, fun, amazing) things or experiences I wanted to do but couldn’t caused me a ton of stress. A now-hilarious example that was totally unfunny at the time: I was moving an Ikea desk into my apartment, tripped and ripped a hole in the knee of my favourite pair of jeans. Not a big deal, right? Well, I hadn’t budgeted for new jeans that month, and had a TOTAL meltdown about it.
Somewhere, someone has probably found a middle ground right out of school, lol. I would read the heck out of their blog and how they did that.
Haha — I’d have bought 3 new pairs of jeans and then wondered why I felt so hollow inside. 🙂
Yeah! I have CapitalOne 360 in the US, and I have all sorts of “piggy banks” where I amortize major expenses over the course of the year. I have an emergency fund, vacation, charity, major purchases, Christmas, etc. Like, at one point I realized I was spending $300 on Christmas cookies every year (I make a LOT and it’s my gift to coworkers and friends). Tack on Christmas gifts, and I thought, ok I’ll put $50/mo in my Christmas fund and then I will have planned for it. So far, so good, and I haven’t had to experience the terror of opening a January credit card statement in a few years now. Keep it up – I’m 6 years out of grad school and always adjusting how I’m saving. After reading a lot of PF blogs recently I started saving a lot more, which really makes it obvious when I splurge and theres $300 left in my checking account with a few weeks until payday!
Oh I *love* that you call them piggy banks! That is so wonderful and I might just have to start doing that.
Also, I think it’s so fun that you’re so into Christmas cookies! I took a slightly different cookie approach last year and made 10 Mason jars “pre-loaded” with all of the dry ingredients for triple chocolate brownies, and then gave those out as gifts to family with the extra instructions to bake them on the card. It probably worked out to about $10 per jar (maybe a bit less?) but for 10 gifts, it was a big win, and (at least to my face, haha) people seemed to really like them. I’m sure everyone who gets your cookies absolutely adores then and looks forward to it every year! So many kudos on saving for it year round 🙂
This was fantastic! I love your honesty and authenticity. And I *wish* gym shoes were the only shoes I’ve spent more than $50 on 😉
Hahaha it helps that I can’t stand shoe shopping – I’m very much a “buy the first shoes that fit my budget and my massive feet and leave” shoe shopper. It all balances out in the end though, because when I’m in a running shoe store, it’s like “Budgets? What budgets? Give me the pretty ones that feel like clouds on my feet please.” Thank you so much for the comment 🙂
Like you 🙂 I had one savings account and that was for whenever needed for whatever – a term too lose to work…
It really is super tough to build a balance when you have those legitimate reasons to withdraw money, eh? Like “This is my only savings, so of course this is the account I will use to pay for X and Y.” That said, I am glad no one told me when I was a new grad this wouldn’t work, because I would have been a ball of stress trying to build two respectable savings accounts! I guess I’m just now “ready” to tackle it.
Yes – because it was allowed to raid it for instant gratifications, it never felt like “proper” saving, so I never felt I had to do without this money. I think saving “properly” is something you mature in to… ideally…
We started a few Tangerine accounts last year when we started saving for our wedding. I really like having the different accounts for the various savings goals. It makes it so clear!
I couldn’t agree more! Plus it makes it a whole lot easier to track your progress towards each one (like your sidebar graph! That would be a nightmare to maintain if it was all lumped together, haha.) And serious, hardcore congrats on saving for the wedding – I have a few friends who have gone into debt for their big days and they aren’t too pleased about it in retrospect!
I feel stuck on the emergency fund right now. A year after emptying my accounts to buy a house, we managed to leave a nice chunk of change in our accounts for an emergency fund. I have swiped off the top of it a couple times for some minor expenses and every time I do it I kick myself. I’m trying to ramp up my other savings so I’m not tempted but it feels easy and I want to figure out if I have it in the right account but it seems all too much right now hahah! I hit the sweet spot with our house expenses and now I think I can put that in autopilot and focus on savings that are more focused and stay away from the emergency fund temptation!
I (clearly) totally get the emergency fund skimming, since I did it for years! It sounds like you are in great shape though, especially keeping some money in the emergency fund through a house purchase – that is seriously impressive! I know it’s the “best practice” and all, but actually doing it deserves congrats every time.
Honestly, my biggest thing with the separate, focused accounts is trying to keep it reasonable – I could so easily think of ten big things that could legitimately have their own accounts, if I wanted to get that granular. To not get totally overwhelmed I figured a few at a time was a good idea, and then I can put those on autopilot like your house expenses and take on some others.
Thanks for the comment, Katelynne!
I use the multiple savings account approach as well! I just had too much trouble tracking all my goals when I just had one generic savings account. I was never positive that I wasn’t cutting into my emergency savings without realizing. Nice job making the shift away from your emergency fund funding your purchasing!
Thank you! And oh my gosh, I know the feeling of trying to keep multiple tallies separate in your head when they’re all sitting in a lump sum in one account. This way makes it a lot more black and white, on top of being way way easier.
This sounds exactly what I have been doing. Time to clean up my act too!
Hey Des!
Great blog, I’ve really enjoyed reading it.
One question on the multiple accounts thing. Are all of your accounts with one bank? And how do you set up the transfers? Do they occur automatically through the bank/auto transfers or do you manually go through and do everything every paycheque/month?
Thanks again for the advice and great blog!
Matt
Hey Matt – thank you so much! It’s always fun when people I know in real life find the blog 🙂
Yes to the one bank thing for the most part. I use Tangerine, mostly because I do all of my banking online anyways and I hate paying bank fees, so I’ve set up automatic transfers that trigger after each of my paycheques into my different savings accounts. The only thing that’s not with Tangerine is my TFSA and RRSP, which I have invested with Wealthsimple – it’s still pretty easy to contribute, I just set them up as a bill payment option with Tangerine, and I do that one manually.
If you want to find out more about either I’m happy to chat more! (But seriously, no-fee banking is the best thing ever. Especially since Tangerine lets you withdraw cash for free from any Scotiabank ATM!)
Thanks Des! You can thank our mutual friend Mel for leading me here! 🙂
I’ll definitely look into Tangerine. Currently my savings accounts are no-fee, as long as I only use them for transfering money into and out of online, but my main chequing account has a fee if I dip below a certain balance. So I’ll take a look to figure out the best option.
One quick question about your emergency fund. You are aiming for $10,000, which is a fairly large amount to be sitting in a bank account not doing anything. Do you just leave it to gain interest? Or do you invest it in stable things that are easy to divulge if you need to?
Thanks,
Matt
Hahaha that is the $10,000 question for sure – I’ve seen a lot of different takes on it, but my philosophy is that is I might need the money in the next 2-3 years, I keep it in a high-interest savings account. My current Tangerine accounts pay 0.8%, which is around what I’d get on many 2 to 3 year GICs in the first place (and doesn’t take into consideration that a) Tangerine pays bonus interest rates from time to time and b) that I can access the money anytime!)
Since the difference between a Tangerine savings account and a GIC at this point is pretty marginal, I just consider any interest lost to be an “insurance payment” on making sure I don’t lose any of the capital. Anything riskier than those two options is a great fit for longer term goals, but if the point of the emergency fund is to be there when I need it, I definitely keep it in an accessible account. Especially after starting to invest this summer and getting a crash course in market downturns, haha.
Last thing – I actually went back and calculated what I really need in my emergency fund to see if the $10,000 figure was actually accurate, and it turns out I need a little bit less than that (for now anyways, haha.)
The key for me is setting up an emergency fund not just in a separate account but a separate bank which ensures there is a challenge to easily transferring back to your disposable income – followed by strict rules about what it can be used for.
Definitely! I did that after writing this, when I finally opened an account with EQ Bank – it’s been so great! It never even crosses my mind to raid it, but it’s still there if I need it within a day or two.