The pay cheques I receive from my 9-5 job (okay, okay, okay it’s more of a 9:30ish – 4ish job) fluctuate each week – I’m paid hourly, not salary, and my vacation time is paid in advance.
This proved to be a problem in the early days of adapting to a more sustainable financial life – I would put together a reasonable plan, coast along successfully for a few months, and then I would have a light pay cheque that threw my personal finances into mini chaos that would have me scrambling.
Inevitably it would take me a few months to dig out. Even after I started aggressively paying myself first. A low pay cheque would throw a wrench in things for me and I’d have to look for some creative banking solutions to avoid paying interest.
Earlier this year I read Worry-Free Money, by Shannon Lee Simmons and found her discussion of Emergency Accounts very interesting – I had never prioritized this type of savings – and I drew some parallels that I thought might be able to help build some consistency into my fortnightly finances.
Simmons focuses a great deal of attention on the psychological aspects of keeping an emergency account, which I can certainly wrap my head around. More interesting to me was that the allocation of money in this account was not just for ’emergencies’, but also useful savings for irregular spending.
It didn’t take me too long to think that an emergency account could work just as well to smooth irregular income.
How I Set Up My Emergency Account
I already had a Tangerine bank account, but I had also recently found out that EQ Bank has a higher base interest rate (if you sign up for EQ Bank feel free to use my referral code: YPH45443001WMB and we’ll each get $25). I wanted to keep the emergency account separate from my other accounts and I have a credit card at Tangerine so I decided to open an account at EQ Bank. In reality, either of these options is great because they do not have a monthly fee and you get unlimited transfers between banks.
Those are really the only 2 must-haves for your emergency account if you are going to use it to smooth income:
1) No monthly fee; and
2) Unlimited transfers between accounts.
Target Balance and What I’m Going to Use my Emergency Account For
I’m targeting a balance of $6,000 in my emergency account, which represents about 3-4 months of living expenses. I recognize that this is light, but I also have confidence in my ability to continue to earn income and I have some disability insurance through my employer that kicks in after 120 days.
These are the things I’m planning to use the emergency account for:
- Traditional emergencies (job loss, injury, etc)
- Buy a car if I decide I need one
- Pay side hustle expenses…podcast beers aren’t free, click an ad yo!
- Capital for harvesting cash from bonus offers (as I did here)
- Smoothing variable income from my 9:30ish-4ish job
Using my Emergency Account to Smooth Income
I have set up my bank account to pay myself first. RULE #1 PEOPLE! This includes retirement savings, and for now, calculated contributions to my emergency account, targeting $6,000 by the end of 2019. These payments are based off a fortnightly income amount that I estimated as the average amount per pay cheque I was paid last year.
BUT – my income fluctuates with each pay cheque. So the day I get paid, I make a transfer between my two accounts…
If I get paid more than average I transfer the extra to my emergency account.
If I get paid less than average I transfer the shortfall from my emergency account into the account I deposit my paycheque into.
This way I always have a consistent amount in my bank account to cover paying myself and my expenses.
I’m also throwing any extra earnings, gifts, and proceeds from the sale of personal goods, into my emergency account. Because I’m allocating everything extra to the emergency account I expect that it will be fully funded by the end of the summer (if the FI Garage expenses don’t eat into it too much!).
After the account is fully funded I will still operate the same way each payday. I’ll keep an eye on the emergency fund balance and if it falls too much, probably anything below $5,500, I’ll start making a monthly contribution to the account again.
Setting up this emergency account has taken all of the worries out of my day-to-day finances. Have you done anything interesting with bank accounts to ease your stress?