In May 2021, more than 22% of households responding to a Statistics Canada survey reported having trouble meeting basic household needs. Not only were these needs routine, but they included unexpected expenses.
This story is an interesting look at how things could go wrong—even when you do everything right. First, however, we’ll clarify what a financial emergency is and then how it can rock your financial stability.
What Is an Unexpected Expense?
Day-to-day life can challenge even the best-thought-out plans. Whether it be your car breaking down, or a need for urgent medical care, anyone could face an unexpected expense.
These events are unpleasant to think about, but they still might happen. So, from a natural disaster to not being able to make your school tuition bill, let’s look at how this all can happen.
How Do Unexpected Expenses Occur?
However, three unexpected expenses rock your finances.
The first expense was your spouse’s dental emergency right before the wedding. The second unanticipated expense was related to care for your newborn child. And the final crisis that cracked your seemingly secure nest egg was veterinarian bills for your family’s best friend, Lucy (a beautiful Sheepadoodle).
Let’s examine how the first event unfolded.
The First Unexpected Expense
You returned to Canada to live closer to family and begin a new life marked with nuptials. However, you and your bride didn’t count on one having a glaring cosmetic dental emergency right before your wedding.
Unfortunately, you thought you could save money by bypassing supplementary insurance. The procedure ended up costing about $3,000 out-of-pocket. Before your marriage started, your nest egg (that made us feel so secure) was already down to $17,000 from $20,000.
Setting up Emergency Funding
It’s essential to pick the proper account to build your emergency fund. If you need money in a pinch, you need to be able to access it quickly.
A savings account should have several characteristics. To keep your emergency savings from getting mixed up with your regular savings account, you should separate them.
Build your emergency fund. If you need money in a pinch, you need to be able to access it quickly.
You also don’t want an account with excessive fees. For instance, you should look for a savings account that allows you to make withdrawals without incurring a charge.
You should also earn interest for the money you’ve put away. By exploring these details with your chosen bank, you can determine if the account you’re considering will meet your goal of building and maintaining an emergency fund.
And, Then a Second Unexpected Expense
The second financial emergency involved the birth of your newborn child. Your child was born in good health, but some minor complications came with a high cost.
Your baby required special care so you and your spouse could continue to work. Your child needed more than a sitter, so you hired a nurse. You also had to purchase some additional supplies for your home.
These unexpected expenses totalled $9,000, knocking your nest egg down to $8,000. But, money is an afterthought when it comes to your child’s health.
Managing Financial Risk
There’s insurance for nearly everything, whether health, dental, vision, life, travel, or car insurance. In choosing your coverage, it’s essential to know which types of insurance and how much coverage you need.
It’s vital to remember that some types of insurance are very pricey and may not be necessary for your situation. But, again, a professional insurance agent can help you with this.
Again, however, watch for extra fees. Compare prices to ensure you’re getting a good deal. Also, before you buy insurance, look at all the protection you already have, whether privately, through your job, or from the government.
And, Another One
Fast forward five years, and you still haven’t had the opportunity to replenish your nest egg. Unfortunately, however, emergencies don’t wait for when you’re ready.
As the years passed, you and your spouse wanted to continue growing your family. Yet, your finances weren’t quite where you wanted them.
Accordingly, you chose to add a pet to the family rather than having another child. Eventually, however, Lucy (the previously mentioned Sheepadoodle) developed a medical condition. The cost of treatment threatened to wipe out your nest egg completely.
The emergency forced you to take out a loan to cover the remaining costs and, hopefully, keep some of your nest egg intact.
How to Prepare for Unexpected Expenses
You’ll probably need to retrieve your money quickly in an emergency. Accordingly, it’s good to keep it in a separate savings account from any other savings account you already have.
The account you choose depends on what you want to do, how old you are, how much money you make, and how much you spend.
A good rule of thumb is to have enough money to cover your living expenses for three to six months. After that, the savings timeframe you choose will depend on your situation.
Resources for Covering Unexpected Expenses
If you face an unexpected financial emergency, figure out if someone else (insurance) might need to pay for some or all the costs. It’s possible that you already have a service contract, a warranty, or insurance that might cover unanticipated expenses.
For example, if you use a credit card to buy something, you may have some protection if something goes wrong. In addition, you might find it covers some or all your emergency expenses.
You can also use the following to figure out how to pay for an emergency. Again, be sure to think about the pros and cons of each strategy to find the solutions that work best for you.
Rearranging Your Spending
You might find some spending habits you can adjust. You can then save the money you didn’t spend on unexpected expenses. You may even start to rebuild your nest egg with this new source of funds.
Alternatively, you could get a loan from your family or friends. However, if you can’t pay back the loan in the timeframe you agreed to, your relationship with that person could become strained.
A short-term, part-time job may help to pay for unexpected expenses. You can also use this money to build your savings.
You could also make money by selling things you don’t use or want at a yard sale, on Kijiji, or in other local classified ads. As a bonus, you’ll likely clean up and organize your home.
Emergency Loans for Unexpected Expenses
In most cases, you’ll find out if you’re eligible for an emergency loan in Canada almost instantly. You could have the money your need in your bank account in just 24 hours. You’d pay back the loan each month with some interest.
You can only use this kind of financing in the event of a real emergency. It’s a short-term loan. In other words, you must pay it back quickly. The interest rate is also usually very high.
Break Only in Case of Emergency
The Pension Benefits Act lists four types of financial difficulty. You can cite these troubles to access funds from a life income fund (LIF) or a locked-in retirement account (LIRA). The four hardships are:
- Arrears of rent on a principal residence
- First and last months’ rent
- Low anticipated income
- Medical expenses
You can use any, or a mix, of these reasons to unlock access to your benefits.
What You May Learn
Like many Canadians, you may be on a tight budget. However, you’re making a point of living within your means and saving for the future.
Still, you had little extra money. As you can see, unexpected expenses quicky take a toll on your finances. Sometimes, life can surprise you—even if you think you’re doing everything right.
You did the right thing by saving money. Yet, you went off course financially because you stopped building your nest egg at $20,000.
Again, most experts advise putting away three to six months of your household expenses as an emergency nest egg. As you can see, anything less can leave you vulnerable to unexpected expenses.
Start Preparing for Tomorrow, Today
We hope this fictitious story has informed you of the perils of unexpected expenses. We also hope it has shown you the importance of saving as much as possible for emergencies.
It’s always helpful to keep up your credit in an emergency. Learn more about getting your credit back on track by reading Creditpicks’ tips for credit repair.