Keep emergency money (last resort funds) in an RRSP
Everyone should have money saved for an emergency. This
emergency fund is not for getting
the car fixed or buying a new TV. It's not for braces for the kids or for
their university education. It's not for your trip around the world or
your Ferrari, or even for buying a house. This is last resort
money, for disasters only. When you can't find a job, your
employment insurance is used up, the kids are starving and your house is being
repossessed, now you can use this money. Also, if you are struck with a
debilitating injury or illness, you will have funds available to ease your
financial distress. Hopefully you will never have to
spend this money, and it will give you peace of mind for your entire life.
When you are young, you don't really need an emergency fund,
because your parents support you. Once you are on your own, a small
emergency fund will probably be sufficient, because if a disaster strikes, you may be able to
move back in with your parents. Once you settle down, have a spouse, and consider having
children, you should do some financial planning. The financial plan
must include enough emergency money to last 6 months to a year.
When you are young and saving money, you
are probably saving for a holiday, clothing, computer, or maybe even a
car. Before you spend your money, you should think about your future, and allocate some of your savings to an emergency fund.
Although you may not need an emergency fund at this time, it is best to start saving money
when you are young, because the longer it is invested, the more it will
grow due to compound earnings.
Once you start working, even part time, you should open a Registered
Retirement Savings Plan (RRSP), and start depositing your Pay
Yourself First money (or more) into the RRSP. The reason we recommend
putting the emergency money into an RRSP is:
