Financial Planning, Saving and Spending, Wealth Planning

Everyone needs an emergency fund—here’s how to build yours

Dec 11, 2023

An emergency fund is a core part of every financial plan. It’s easily accessible money you can draw on to cover a period of unemployment, repairs to your home, major appliances or car, or any other unexpected essential expense. With Canada’s economy slowing and prices continuing to rise, this type of “just in case” or “rainy day” fund is more important than ever.

Where should you put your money?

It’s a good idea to separate your emergency fund from your regular savings because it serves a different purpose. While you may be accumulating money for all kinds of reasons—including retirement, education or a down payment—the money in your emergency fund should be used strictly to see you through a crisis.

A savings account that pays interest but gives you instant access to your money can work well. So can a Tax-Free Savings Account (TFSA), where your money grows and can be withdrawn tax-free. Remember, this money needs to be available whenever you need it, so don’t lock it into a long-term guaranteed investment certificate (GIC) or invest it in potentially volatile equities.

How much do you need to save?

A common recommendation is to save enough to cover six months of your usual expenses. To translate that into a dollar amount, you’ll need to create a budget (an excellent idea anyway!) that lists recurring costs (such as mortgage/rent, utilities, internet, streaming and phone services), as well as anticipated one-time costs (such as an upcoming furniture purchase, renovation or vacation).

Once you have your six-month number, work out how much you can commit to setting aside every month to fill your emergency fund to that level. Treat regular contributions to your emergency fund like any other necessary recurring cost—it should be required, not optional. Ideally, set up regular transfers into your emergency fund so you don’t have to think about it.

Where can the money come from?

You may be able to free up money for your emergency fund by trimming other areas of your budget. Cutting $20 here and $10 there can add up quickly. Alternatively, maybe there’s a way to earn a bit extra or sell something of value that you no longer want.

In general, try to avoid diverting money away from long-term goals such as retirement. It’s much better to source money for your emergency fund without compromising other important objectives.