Managing Debt and Unexpected Expenses
According to a new Manulife survey, thirty-eight percent of Canadians report that they were “caught short” without enough funds to cover their expenses at least once in the past year. This is despite the fact that the same survey reveals that 75 per cent of those polled feel adequately prepared to deal with an unexpected household expense. There’s an evident disconnect between the figures here: what accounts for the difference between Canadians’ perceived confidence and the realities of their financial demands?
Manulife’s research has found important links between these statistics and the perceived affordability of home ownership in major urban markets. However, the study also raises an important point: it’s not just about having a rainy day fund, it’s about the kind of resources you use to build up your preparedness. Unexpected expenses can strain your ability to pay off debt and achieve financial independence, or worse, land you in greater debt. And yet, coming in just behind lines of credit at thirty-three percent, those surveyed said that they relied on credit cards thirty-two percent of the time in order to create an emergency spending buffer. The added interest and debt risk associated with credit cards makes them a poor choice for this application! Paying for unexpected expenses with credit actually depletes the amount you can redirect to your savings or emergency fund in the future.
The size of many Canadians’ rainy-day accounts also suggests that they may be less prepared than they believe. Fewer than one in four (24 per cent) homeowners has more than $5,000 set aside for an emergency, and half indicate they either have “$1,000 or less”, or don’t know how much they have for emergencies. A general guideline suggests saving the equivalent of three to six months worth of your salary to cover any unexpected expenses, though some analysts are revising that amount upward. However, it is easy to start small with these contributions and work your way toward a specific goal.
This raises the very important question: is it more important for me to pay off my debt, or to contribute to an emergency fund? Mixing rainy-day savings and debt together could be a dangerous process. Paying down your debt may make more sense in this scenario – this will allow your future contributions to be more valuable.