I hope others thinking of putting off saving for their emergency fund will consider how nice it will be on the day the debt is gone AND there is money in the bank.

Also, because you have debt it makes it more important to have emergency fund. You need those funds to be there just in case you get laid off from work, or you need to stop working due to illness. Just because your income stop coming, you still need to make payments.

I have my saving accounts with Citizens Bank of Canada. I used to be saving with ING until after I became unhappy with its customer service. Anyway, like Gail says, find a bank that offers high interest saving accounts, and that you could be happy with. There’s no excuse not to have a saving account.

Because of the pension (assuming that I have a job till then), my retirement income will be almost the same tax bracket… so I’ll be paying the tax sooner or later.

Usually, I have money on hand in annual cycles – because I save for my annual 10% mortgage pre-payment (though last year I only managed to save for 8% – boo!). So if something happens in the months leading up to the payment, I’m good for money. But if something happens right AFTER that payment, I’m tapped, and would need to draw on the RRSP.

Savings vs. Paying off credit cards:
Mathematically, it makes sense to pay off the expensive CC debt instead of putting it in an emergency savings account, especially since bank interest, pre TSFA, is taxable… reducing the amount of interest you receive even more!

BUT, and it’s a BIG but – your credit card may not always be available. The credit card company may decide (especially with the current ‘credit crunch’) to reduce your credit limit at any time – and possibly at the worst time… say, you lose your job! So paying a premium to ensure you have the emergency fund available to you may make sense. Personally, I wouldn’t feel comfortable depending on credit cards for an emergency.

I like to think of it in accounting terms. When my paycheque is deposited into my bank account, I pay all of my bills and allocate my money accordingly. Then I made a Net Worth Statement — I list all of my assets to get a dollar figure for penny I have…then I list all of my liabilities to get a dollar figure for every penny I owe. I subtract the total assets from the total liabilities to give myself a net worth.

The point I’m trying to make is if you’re putting some money towards savings, instead of directly on debt, you are helping your financial situation. Not only are you working towards a saving or emergency fund, in case something goes wrong (and it probably will), but you are creating assets for yourself that you can use, instead of always being at $0, and scurrying to pay down the debt as quickly as possible.

I started the fund while paying off my debt and it was empowering to pay for emergencies from the meagre fund while I was building it up than it was to fund the emergency with credit.

Car expenses/emergencies have always been kept separate, once the payments are up, I transfer 3/4 of the former monthly payment into a “car account” and repairs, maintenance and downpayment from the next car come from there.

It took me 4 years to get out of debt and I can assure you it is worth the effort. Emergency funds are crucial. Good luck!

Notice that the emergency fund does not come from the debt repayment allocation!

Once debt is done, catch up on your long-term savings (wish list) and RRSP (if it suits your financial situation), you have 15% of your income to reorganize!

What I would like to separate into two accounts: emergency versus cashflow account (expected expenses which occur only occasionally). I have to get to that…

By focusing on saving for what I want while I work on paying down my debt, I’m teaching myself to enjoy delayed gratification and the joys of having some money in the bank instead of feeling bad about myself when I have $0.38 in my account before payday.

I’ve had several instances where I focused on paying off my debt and had no savings only to turn back to the credit cards and fall back into the same debt cycle. So now I’m trying to find a balance and hopefully continue to pretentd I don’t have credit cards!

I’m also going to start a Christmas/gift account at the end of the year. I’m doing well to pay for Christmas this year without going into debt but it would be nice to not have to come out of my dayd to day spending money.

You could make the argument that paying down your existing debt is like building up an emergency fund (if you think of it as an equation, like Savings = The room you’re clearing on your credit limit which you leave open for an emergency) with the added benefit of lowering your interest payments.

I personally have issues with this but mathematically it makes the most sense to liquidate savings which pay low interest to pay off debts which charge high interest. Thoughts?