How Much Should My Emergency Fund Be?

Financial experts generally recommend that most people should aim to have an emergency fund that would cover three to six months of expenses in the event that you lose your job and no longer have an income. That being said, if you have high-interest debt that you’re struggling to pay off, then you can have a more conservative emergency fund, somewhere in the range of $1,000 up to $5,000. You want enough of an emergency fund buffer that you could handle a few unexpected expenses, while still being able to focus on paying off your debts.

In some circumstances you should ideally have an emergency budget that would cover as much as a year’s worth of expenses. This is true for those who have a highly specialized job and it might be hard to find a new one or who are nearing retirement and won’t have as much time to build up enough wealth to comfortably ride out a financial downturn (like a recession). You should also aim for a year’s worth of savings if you have a large family with many dependents who rely on your income.

What is An Emergency Fund?

An emergency fund is money that you diligently set aside in an account to pay for unexpected expenses. As the name implies, the money you save should only be used for true financial emergencies, such as if you lose your job and could no longer cover your essential living expenses.

Your emergency savings should be in a separate account that you contribute to on top of your other savings. In that way, you can ensure that you don’t have to take away from other important nest eggs (like a retirement fund or saving up for a home) to grow your emergency account.

Sometimes it can help to think of your emergency fund as a form of insurance. We have medical, car and home insurance to protect our most important assets against irreparable damage, so think of an emergency fund as a distinct form of insurance that helps protect your financial health. 

Why is An Emergency Fund Important?

Having money in reserve for emergencies can help you in a variety of ways. 

Financial control

Generally speaking, when you have a financial safety net, you are less vulnerable to the unpredictable ups and downs of the national and global economy. You have more control over your finances —and by extension — your daily life.

Peace of mind

When you feel more secure financially and are confident that you can handle a monetary emergency, you have less stress, which can have a major impact on your overall mood and quality of life, as well as the wellbeing of your loved ones.  

Reduces hardship of job loss

Being laid off or fired from a job is one of the worst things that can happen to a person in both a fiscal and psychological sense. Knowing that you have enough money put aside to weather a rough patch helps ease the trauma of a job loss and gives you the breathing room you need to find a good employer rather than just take the first job that comes along.

How Much Do I Need in An Emergency Fund?

There is no one-size-fits all answer as to how much someone needs to save to cover essential expenses. As noted above, financial experts recommend that most people should aim to save enough money to cover anywhere from three to six months worth of expenses. While other people, such as those with many dependents or those who may have a hard time finding a new job, might need to put aside enough to cover a year’s worth of expenses. The bottom line is that the more money you can put aside, the more of a financial cushion you’ll enjoy and the better off you’ll be when an unexpected financial emergency strikes. 

How Do You Build An Emergency Fund?

The earlier you can start building your emergency fund, the better. Here are some steps to consider.

Create a budget

To build an emergency fund, you need to figure out how you’re going to bankroll it and without a budget it’s nearly impossible to know where the money will come from. Mapping out a budget helps give you a clear picture about your monthly costs and spending patterns.

Once you break down where all your hard-earned dollars go, you’ll then be able to have an accurate understanding of how much you spend on your wants versus your needs. While you likely won’t be able to take money away from essentials (like rent and groceries), you can adjust what you spend on non-essentials like take-out meals and entertainment. You’d be surprised just how much you can save by cutting out cable or making all your meals at home rather than ordering in or going to a restaurant.

Start small

Once you’ve figured out where you can trim your costs by creating a budget, decide how much you want to put away every two weeks or monthly. Though it’s great if you can put a large amount of money into your fund every month, you don’t want to start with an unrealistic amount that can leave you feeling discouraged when you fall short due to unforeseen expenses. It’s much better to set a goal of $50 and stick with it diligently than to set a goal of $100 a month and quit when you can’t keep up with deposits.

Open a separate High-interest Savings Account or GIC 

It’s wise to keep your emergency fund separate from your other accounts so you can track your deposits and watch your money grow. Separating it from your other regular savings funds ensures that you always know exactly how much you have available.

Automate savings

The best way to ensure you build up emergency fund savings is to make it as automatic as possible, so you don’t even have to think about it. Banks make it simple to set up automatic transfers, so once you’ve decided how much to contribute each month, just arrange for the money to be automatically deposited into your emergency savings account after each paycheque, or once a month. Not having the money sit in your chequing account is also a good way to make sure you are not tempted to spend it. 

Where Should You Keep Your Emergency Fund?

While you can keep your emergency fund wherever you like — even your mattress (though we don’t advise it!) — the two key things to consider are liquidity and growth. You want your money to be easily accessible (i.e., liquid) because you may need to cover unexpected costs quickly, depending on what kind of financial emergency you experience. Ideally you also want your emergency savings to grow above and beyond what you put into the fund. Investing in the stock market might have the potential for large returns, but it also has the potential for big losses. Here are two safer options:

• A high-interest savings account: Over the last few years a growing number of alternative banks (mainly online-only ones) have begun to offer savings accounts that have high-interest rates — rates that can be anywhere from 10 to 100 times more than what traditional banks offer. Digital only banks also tend to have no-fee accounts, so not only do you get a high interest rate, you also save money on bank fees. Better yet, if you haven’t maxed out your tax-free savings account deposit limit, open a high-interest TFSA and take advantage of tax-free returns to really amp-up your emergency savings.

• Guaranteed investment certificate (GIC): Though GICs are not as liquid as savings accounts (because you’ll have to keep your money locked in for a set period of time) they are a secure way to profit from higher interest rates.

When Should You Use Your Emergency Fund?

When it comes right down to it, each individual must decide for themselves what constitutes an emergency expense. That being said, it’s unlikely there would ever be a scenario in which an extra-large caramel macchiato or a meal at the city’s hottest new restaurant would ever be a valid reason to make a withdrawal from your emergency fund.

Remember that an emergency fund is designed to be a financial safety net in the event you lose your job or suddenly need an infusion of cash because of an unexpectedly large expense that you didn’t have time to save up for. The funds should definitely only cover something that is a need and not a want. 

Scenarios in which your emergency money should be used include:

• Essentials like rent, utilities and food that you could not otherwise pay because you lost your job

• A sudden medical emergency 

• Car repair (but usually only if you need your vehicle to get to work and thus the loss of a car would severely impact your income)

• A major home repair. Repairing the basement after a major flood would count as an emergency whereas updating your bathroom with a new vanity when the old one was functional (if not attractive) would not

The Bottom Line

When you first start out building up an emergency fund it can seem overwhelming — especially if you make a low income and normally find it hard to make ends meet. But if you doggedly stick with it and set aside even a small amount each month (even as little as $10) and put the funds in a high-interest savings account or GIC, you’ll have a respectable pot of emergency savings before you know it.