13 – How to Create an Emergency Fund When in Debt

Wayne  0:04  

Welcome to another episode of the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. And in today’s show, we’re going to be discussing how do you create an emergency fund if you’re in debt? This is something we’ve all been told for how long and it’s so hard to do. 

So to help us out my guest today, Derek Chase from Derek Chase & Associates in Campbell River. Hi there, Derek.

Derek Chase  0:29  

Hi Wayne, how are you today? 

Wayne  0:31  

Great. How are you doing?

Derek Chase  0:32  

Very well. Thanks.

Wayne  0:33  

Terrific. How long have we been hearing about having this emergency fund?

Derek Chase  0:38  

I think you’re right. I think that it’s been forever. And it’s such a struggle to get there in certain circumstances, but it’s definitely doable. And let’s talk about how to get there today.

Wayne  0:49  

Right. And we had a lot of people though that we’ve talked to about this before. In the last little while, either people are doing great and building up savings or people are not doing great. If you’re not doing great, I think survival is kind of the priority, as opposed to putting together an emergency fund. So we’re going to talk about this – coming from the angle of people who are already in debt, having a hard time is where we should start.

Derek Chase  1:14  

I think that’s a practical way to go about things and so much about money and finances and debt surrounds momentum. So if you can, you can get a little bit of a beachhead going with an emergency fund, it really makes the rest of life and handling your finances easier to do. So even though it might seem daunting at the time you’ve got more month out there than money – there are ways that you can go about just slowly and gradually getting that momentum changed. So it’s a good endeavor to take on and a great goal to have.

Wayne  1:53  

So let’s talk about what you do when there’s nothing left at the end of the month. How do you go about saving?

Derek Chase  1:59  

Well, I think the first thought that comes to mind is to take a really hard look at where you are spending each month. And so many people that we interact with, have a good idea about what their housing is costing them and what a car loan is costing them. But beyond that, it gets really fuzzy really fast. 

There are expenses within your existing monthly cash flow that are worth taking a look at to just ask the question whether you’re spending the right amount on those categories. And if you can find just one or two or three areas that can change, just even modestly, that’s enough to start moving the savings dial. 

So the first step, as always with finances, is to put the numbers down, have a look at them, what they’re  showing you as far as your income and expenses on a monthly basis.

Wayne  2:59  

Write it down and there’s so many apps these days where you can track where all your money’s going.

Derek Chase  3:06  

Yes, that’s certainly one way. Apps are fantastic. A spreadsheet is my personal favorite. But it doesn’t have to be complicated at all. It could just be a pen and a piece of paper. And you start tracking where your spending is going. And it’s sometimes pleasantly surprising when you can find an area that’s a lot bigger than you thought it would be and you can make some changes – to whether you’re buying a coffee every day or eating out for lunch more than you maybe need to. 

So there can be some areas within your existing budget that even with that little bit of work, you can root out and start saving. But in general, I like the saying, ‘start small, start now’. And in my opinion, a lot of savings plans with all the best intentions fail because people start with too ambitious of a number or too ambitious of a goal. And that savings plan might work for a month, and then it collapses because there’s too much pressure coming from a person’s creditors or other areas of life.

Wayne  4:30  

And you don’t want to take away all the joy of living. So if you say to yourself, Okay, no more coffees, no more eating lunch out. Well, okay, maybe you can do that for a month. Maybe you could do that for two months. But after three months, you start to feel like – I really need to go out, I need to maybe take it as a celebration that you’ve been tracking for this amount of time.

Derek Chase  4:51  

Now that’s a good point. You can definitely celebrate milestones along the way as to whether you’ve been able to save, whatever that milestone is. It could be $100 or $200, or $1,000, or whatever goal you set. There’s nothing wrong with having a celebration there, I totally agree. You know, life is not about living and not living. You need to celebrate those good times. 

A couple of my favorites for just getting started, that we like to talk about with people –  I remember talking to a retired couple who had no savings, and they were very much cash people that like to operate in cash. I said, Well, why don’t we just try for three months – that every Toonie that you get back in change, you save. And I like that number because the quarters and dimes are a little too small. So at the end of three months, they were just thrilled with how much money they saved over that time. You know, it doesn’t have to be $50 a month or a set amount of $200 a month or whatever that number is. It can be something exceptionally small. 

Another angle on that could be if you’re more of a plastic person. I think virtually every bank or credit union has a program that each time you swipe your debit card, they will either round the transaction, or just simply push like 50 cents to a savings account. And that might not sound like very much but over time, it’s going to start building up an emergency savings account. 

Wayne  6:37  

It’s shocking how many times I use my debit card. So I could see how that would build up very quickly.

Derek Chase  6:42  

Yes, exactly. And I really love those savings programs where you don’t really see it, you know, you don’t see it happening so much. Another strategy there could be to have even the smallest amount taken off your paycheck, whether that’s $10 or $20 and have it going into some type of savings plan. And then you’re not really forced to make that decision to actually do it. It’s just happens. I really like those types of savings.

Wayne  7:08  

So what about the people that say – they always start it, they have got great intentions, but after about a month, they end up that it doesn’t work out for them. Or maybe they make it four or five months, and then that doesn’t work out anymore? They stopped saving.

Derek Chase  7:22  

Yes, that’s a challenge for sure. And I think I would recommend to those people to not give up but to start with a smaller amount or to pick a smaller amount to save every month. And then you also really have to just have a look inside as well and say, what do I really want to accomplish here? 

I just read an article yesterday about the sacrifices some folks were making to save up for a downpayment on a real estate purchase. And if you really have a goal, whether that’s a downpayment or an emergency fund, if it’s your number one goal, then you are going to make some sacrifices to get there.

Wayne  8:03  

Maybe that’s a part of the secret, right? That is exactly what you’re mentioning that we really need to be serious about it if we really want to make a difference.

Derek Chase  8:12  

Oh, 100% 

Wayne  8:15  

Yes, a declaration, you’re making this as an absolute – we are going to be making a difference here. And we’re going to actually start saving money.

Derek Chase  8:24  

Yes, that comes out in some of our financial counseling sessions. Especially if we’re talking to a couple, and we really like to go over their individual needs and wants and have them, write down some specific goals, and then compare those goals that they have. Because if one person’s goal is to build that emergency savings, and the other person wants to go visit relatives in Toronto, well, you know, there’s a conflict and a tension there in the household. Whereas if they can agree as to what the number one goal is, then that builds some momentum. And they’re both pulling on the rope in the same direction and instead of pulling apart

Wayne  9:08  

I don’t know about this, but when it comes to it and you have debt, and you want to start a savings plan, should you pay off your debt first, or how does that work?

Derek Chase  9:22  

Yes, that’s a really good question. And it sometimes takes a hard look at what the numbers are and what the interest rates are. But if the debt has reached a point where it’s just consuming everything and consuming your energy, you’re not making any headway on it and you’re getting collection calls, maybe even to the point of a garnish or court action –  then sometimes you do have to put up a formal wall between you and the creditors to really break that momentum. 

That can happen with federal options such as a Consumer Proposal or a Bankruptcy filing. And that can really jumpstart, changing the momentum that I talked about – because then all of a sudden you’ve got, you literally have a big change in your cash flow. So you’re able to save quite quickly in that setting. But on the other hand, if your debt is more modest, then you can just rearrange your budget in order to start building a small savings.

Wayne  10:28  

My wife was much better at saving than I was. So I can thank her for being so good at this. But I remember there’s a point where we were in debt and had a lot of credit card debt. And I had to take on teaching guitar lessons. I taught guitar lessons to a lot of students and it took a few years, but got that debt all taken care of. But while we continued to do that, she did insist on saving, even though there was, as you mentioned, more month than paycheque. Yes, so maybe there’s something else you could do on job wise. 

Derek Chase  11:06  

Yes, that’s a good point. I mean, the new word for having a second job is called a side hustle. And certainly nothing wrong with taking on that side hustle to change your monthly budget. You know, changing a monthly budget, you’re either going to increase your income, or decrease your expenses. 

So we’ve been talking a little bit about finding some ways to potentially decrease your expenses. But on the other side of the coin, increasing your income is fantastic, as well. And if you can fit in some of that, using maybe one of your hobbies, that can translate into a little bit of cash flow. And again, it doesn’t have to be that much. It could be something really quite modest. And all of a sudden, you’re plowing that money into savings, and then potentially using that extra cash flow to pay down debt as well. Yes, that’s, that’s a great way to go about it.

Wayne  12:06  

We used to laugh because I’d always say, well, that’s a car payment, I’ll do that. And that was roughly a car payment as well that I made from that. And that was always my line. So if they would do something and be like, Hey, you’re making another car payment, that’s awesome. And that was a small amount. It wasn’t like we’re looking at making $1,000s of dollars doing this side hustle thing. It was just hey, here’s 50 bucks, $100, $200. And the main big difference.

Derek Chase  12:30  

Yes, when you put your earnings or spending in the context of, of a car payment, or some other type of life expense, it really makes it hit home. So that’s good to have that perspective. 

Wayne  12:43  

I think it was a fun way of doing it. Somebody mentioned to me that what they did was they took all their expenses, they sat down and they figured out the expenses like the car insurance that happens every year, the taxes, the garbage, – all these little things that come up throughout the year. And all of a sudden, they kind of surprise you with a $500 bill here. And if you’re on a tight  budget anyway, and all of a sudden you get a $500, $600 bill from the village or the city, saying, well, we get to charge you for water and sewer at this point. Sometimes you’re like, Well, where does that money come from? How do you deal with that?

Derek Chase  13:17  

Yes, those can be nasty surprises. I call them like throwing curveballs at you. And there’s definitely a set of regular monthly expenses that you can be pretty comfortable with knowing that the same expenses are going to be there next month. And we talked about the cost of housing, car loan payments, food – is often at the same sort of level – but then you have a whole raft of payments that we would call irregular payments that might just happen once a year, or just pop up randomly. 

So one one exercise that we like to work through with people is to have them forecast once a year or twice a year –  have them forecast what’s coming up in the next six months or maybe even the next 12 months, especially if a person is working with commission type income or some type of irregular income. So then they get a feel for what they need to have for a whole year because so often we get focused on the next payday or next month – and you don’t really see those irregular expenses until they’re right on you. So it’s that old motto of being prepared. And if you can see that, you know five months down the track you’re going to have some unusual irregular expenses then Gosh, now’s the time to be getting ready for it.

Wayne  14:50  

We would just break it all up and have it separately go into different bank accounts. It seems to work just great. So when it comes to saving, how much is enough? What should be the target?

Derek Chase  15:02  

I think that varies from person to person. We like to suggest that you have at least two months of living expenses available to you. And that might seem like an impossible goal, people might be shaking their heads right now, but that doesn’t have to happen tomorrow. 

If you made a goal to say you wanted $2,400 in the bank, just to take an example, but you want to have it within two years. So that’s $100 a month, that makes it more attainable to get two months of living expenses, I think is enough to get a person through some shock of illness, or injury, or some emergency travel that comes up. 

But, for some people, they would want way more than that, and other people, they’re happy just to have a smaller amount. So I think it’s, if you’re in a household where there’s multiple people, you want to have that discussion and say how much is enough and just get everybody on board. And obviously, if it’s just yourself, it’s a much quicker decision. But I think that’s a good benchmark.

Wayne  16:23  

Terrific. Anything else we need to know about creating an emergency funds, even if we’re in debt,

Derek Chase  16:28  

I just think it’s doable that you should go for it. Again you know, start small, start now. Once you have that emergency fund, it just makes life a lot smoother. And you can weather the ups and downs a little bit better. So go for it. 

Wayne  16:45  

Terrific. Good advice. And Derek, thank you very much for being on the show today. And if you want to learn more, get a free consultation with Derek – you can go to bankruptcytrusteeBC.ca. And that’s it for today’s Debt Matters podcast. You can subscribe anywhere that you get your favorite podcasts from and of course, if you want some more information on these topics, you can always check out debtmatters.ca Thanks very much for listening.