Written by: Carmela Lombardi
November 12, 2024.
Inflation is affecting Canadians across the board, from rising grocery prices to higher housing costs. In today’s economy, having a well-planned emergency fund is essential. Inflation reduces the purchasing power of money, meaning the emergency fund you’ve carefully built might not cover what it used to. With economic uncertainty looming, ensuring sufficient saving is critical to weathering unexpected financial storms.
Why Emergency Savings Matter More Now
In times of economic instability, having a robust emergency fund becomes even more essential. Given periods of inflationary rises, increased interest rates, and housing affordability, financial uncertainty is often the result. Add in unexpected job losses, reduced work hours, or rising costs for essential goods and services, and household budgets can quickly become strained.
An emergency fund acts as a financial buffer, providing immediate cash access when needed. Without adequate savings, families may find themselves resorting to high-interest credit, leading to more financial stress.
Shrinking Purchasing Power
Inflation means your money doesn’t go as far as it once did. While Canada’s inflation rate has decelerated over the last few months, Canadians have seen many costs rise. The same $10,000 emergency fund covers fewer months of living expenses than it previously did. For instance, if your monthly grocery bill was $500, it’s now around $530, a noticeable increase.
Housing Costs: A Key Pressure Point
Housing costs have risen sharply in many Canadian cities, with rent prices up 8% nationally. If your emergency savings were based on earlier rent or mortgage payments, today’s costs could leave you underprepared. If you suddenly lose your job or face an unexpected expense, your emergency fund may run out even faster than anticipated.
Practical Tips to Protect Your Savings from Inflation
Given the current economic environment, it’s vital to reassess your emergency savings plans. Here are some practical steps I share with clients to ensure your emergency fund can handle increased pressures:
- Increase Your Emergency Fund Size
The old rule of thumb was to save three to six months’ worth of expenses. However, I often suggest increasing the threshold to at least four to eight months in today’s inflationary environment. A simple review of your budget may allow for this adjustment.
- Use High-Interest Savings Accounts
Traditional savings accounts often provide low returns that don’t keep pace with inflation. Move your emergency savings to a high-interest savings account (HISA). Many financial institutions offer HISAs with better rates, helping your money grow faster.
- Automate Regular Contributions
I often suggest that clients put their savings on autopilot with automatic transfers. This approach ensures you consistently add to your fund, making it less likely to skip deposits. Even small amounts add up over time.
- Maintain Liquidity
While higher-yield investments might be tempting, remember that emergency funds need to be liquid and accessible. I often caution clients from investing their emergency savings; you may consider a mix of 75% of your emergency fund in a high-interest savings account and 25% in short-term secured deposits like GICs/GIAs. This balance allows for some modest growth while keeping the majority of funds readily available.
Looking Ahead: Inflation and Your Financial Plan
Shifts in the economic landscape will remain a factor in Canada for the foreseeable future. Now is the time to adapt your financial strategy and ensure that your emergency savings continues to serve its intended purpose: to provide a safety net during tough times. Simple and proactive tips like increasing your savings, using smart products, and keeping a close eye on your budget, can help protect your finances from inflation’s worst effects. Partnering with a trusted financial professional can further provide tailored strategies to help achieve your savings goals.
Inflation may reduce the value of money, but careful planning is key to staying resilient, adaptable, and on track, no matter how the economic climate changes.
Carmela Lombardi, Hons BA President, The Financial Boutique Financial Literacy Chair-Advocis, Durham Chapter Better your finances, better your life.
