Did you know that an emergency fund is an important part of a financial plan? This money will not only keep you afloat in times of need, it will also prevent you from getting into debt.

What is an emergency fund?

An emergency fund is money you set aside to use for unforeseen events or for needed but unplanned spending. Examples of these events would be hospitalization for a sudden illness or repairs for a leak in the roof of your house.

Experts advise saving an amount equivalent to three to six months of your salary for emergencies. A more conservative estimate would be three to six months of your living expenses (check Community Resources below for Emergency Fund calculators). The amount depends per person or family. But if you are just starting out, a safe target would be three months of your household expenses.

Having an emergency fund is essential because it can keep you from maxing out your credit card, dipping into your retirement fund, or your child’s college fund should unexpected events happen. It can give you peace of mind and keep your finances stable for whatever happens in life.

Watch this video from Fidelity Investments to learn about the “Three things you need to know about an Emergency Fund”:

What counts as an emergency?

When we talk about emergencies, we mean situations like the following:

• Losing a job
• Medical emergencies
• Essential house repairs
• Car repairs (especially if it is your only means of transportation)
• Bereavement-related expenses (travel, burial or hospital expense for the death of a relative)

How to start building an emergency fund

Start by regularly saving small amounts every month. According to Rob Carrick, personal finance columnist of The Globe and Mail, a fast way to start is by “using a lump sum amount like a tax refund, bonus or gift.” Other ways to start would be:

• Saving money from a bonus or earnings from a sale of an asset (e.g. a second car you don’t use, equipment, furniture from a garage sale, etc.).
• Rerouting money saved from cutting household expenditures such as cable TV consumption, or payment for a landline if you already have a cellular phone.
• Saving half of your vacation budget by choosing a less expensive holiday.

Whether you start small or use a lump sum, the important thing is to start building the emergency fund as soon as you can.

Where do I keep it?

It would be ideal to keep a separate account for your emergency fund at a bank or credit union. The fund must not be too easy to take out from, and yet “liquid,” meaning it can be easily moved or withdrawn when you need it. It is also essential that the money is protected from sudden downturns in the financial market, so avoid risky investments. Experts suggest keeping your money in a high-interest savings account or a Tax-Free Savings Account (TFSA) to keep your funds secure and easily accessible.

Keep saving! Every bit counts

The Golden Rule of saving is to “pay yourself first.” Setting aside a small amount every month is a good habit to have. You can set automatic transfers from your payroll account to your emergency fund account every payday. Before you know it, you will have grown substantial savings that you can use for your needs. Remember to put back whatever amount you take from your emergency fund to keep it intact and growing so that you are always ready for life’s surprises.
 
Article updated February 16, 2023.