Plan for life's surprises to keep your finances on track

Life is full of surprises, some of them wonderful (like having twins) and some not so wonderful (health crisis, job loss). Either way, they can be costly and have a significant impact on your finances.

Unless you have a contingency plan, including an emergency fund, insurance protection, and a debt management plan, events like these could affect your current or future financial well-being. For example, to cover immediate costs, you might rack up credit card debt or dip into savings earmarked for longer-term goals such as your retirement or a child's education. Either way, once the crisis is past, you will need to make up lost ground. Let's take a closer look at three essential components of a comprehensive contingency plan.

Cash cushion

An emergency fund is simply a source of cash that's easily accessible whenever you need it, for example, in a Tax-Free Savings Account (TFSA) or high-interest savings account. According to a recent CIBC poll,¹ nearly half of Canadians (45%) don't have an emergency fund. Some Canadians may rely on credit to cover unforeseen expenses.

How big should your emergency fund be? Many experts recommend setting aside enough to pay all of your household's expenses for a minimum of three months, and preferably six months. Build your emergency fund with regular contributions into a separate account, and make sure the money is invested for liquidity so you can withdraw it at a moment's notice, without fees, penalties or tax implications.

Insurance protection

Insurance protects you and your family from the financial repercussions of specific risks, including disability, critical illness, job loss and death. Even if your employer offers a benefits package with insurance coverage, it’s important to make sure you have enough for your household’s needs. Insurance products are available that are designed to cover credit card and mortgage payments after a disability, job loss, or death.

Debt management plan

The less debt you hold when a crisis strikes, the more flexibility you will have to manage your finances through difficult times. First, you will have more cash flow because less money will be going towards covering debt payments each month. Second, with a lower debt-to-income ratio, you may be in a stronger position to borrow money if you need to.

Remember that your Financial Advisor can help you work through possible scenarios and set up an appropriate contingency plan so you’re ready for life’s surprises.

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