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How a Rainy Day Fund Can Improve Your Debt Management Plans

It’s December, so most of Canada is busy with the hustle and bustle of the season, trying to make sure the holidays are successful for family and friends. At this time of year, purchases can start adding up quickly; and since credit cards are the preferred method of payment for a growing number of Canadians, debt can be the unforeseen consequence. It’s unusual for Canadians to spend the holidays thinking about debt options or a rainy day fund, but December is actually a great time of year to start an action plan for debt reduction.

Setting a budget and keeping your future in mind are both critical as you hit the malls this month. Here’s how to go about doing that and avoiding credit card statement shock in January.

How does a rainy day fund help me and my debt?

A rainy day fund’s biggest benefit to you is being there for an emergency, such as a job loss or unexpected damage to your home or car. If you haven’t got money stowed away for these unforeseen events, paying for them will come down to loans and credit cards, both of which carry high interest rates and a fair amount of risk.

Beyond having this cash flow, though, a rainy day fund also gives you the opportunity to put money into an investment that can grow over time. A Tax-Free Savings Account (TFSA) is a good example, along with other investing options like an RRSP or GIC. With your money locked away and getting the benefit of interest growth, these accounts aren’t just there for an emergency, they’re a great way to grow your money.

How much should I put away?

This advice from CIBC pegs your ideal rainy day fund at 3-6 month’s income. Unfortunately, for many Canadians living paycheque to paycheque, this type of investment isn’t possible. If this is the case, seeing a Credit Counsellor may be a solution – they can help you restructure your current debt to help save you money in the long-term. This may free up some funds for starting a rainy day fund or simply making an extra payment on your debt.

Why should I start now?

This time of year people often feel the pressure to find the “right gift”, or to make family gatherings extra special, which can quickly lead to overspending. After making too many holiday purchases on credit, many are left needing help with credit card debt in January. Beyond that, though, these spending habits can be hard to break long-term. New Year’s financial resolutions may be good in concept, but studies show that just 19 per cent of Canadians fail to keep their resolutions for more than 24 hours. Statistics also show that you have a better chance of success in the long run by making small changes now, as opposed to trying to change everything all at once later.

To use a cliché, it’s important to strike while the iron is hot. Make a promise to yourself to not to add to your debt during December. Set a budget that works for you that includes debt repayment options and a rainy day fund. Just as important, start your rainy day fund before you spend away any possible contributions in December. Paying off debt is a marathon run over a long period of time. Having a rainy day fund available for emergencies is crucial for avoiding steep hills in the road.

Is a rainy day fund a part of your debt management plans? How will you choose to NOT add to your debt in December? Join the conversation on social media. #LetsTalkDebt #DebtFreeDecember

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