What is An Emergency Fund?

An emergency fund is money you set aside to pay for unexpected expenses. These can include things like medical expenses or unexpected home or car repairs. An emergency fund also provides a cushion in the event you lose your job or have an unexpected loss of income. It’s an important financial safety net so you don’t have to borrow money if something unexpected happens to you, your home or your family.

Why Is It So Important?

No one has a crystal ball telling you what will happen in the future. We all hope for a long, healthy and happy life, but sometimes there are bumps in the road. Having an emergency fund can help ensure that unexpected events do not derail your progress toward your financial goals. An emergency fund can keep you on the right path, make you financially resilient and reduce the anxiety that comes with unexpected expenses.

Setting aside a small part of your income regularly allows it to gradually grow into a safety net. Over time, this safety net provides peace of mind and stability, cushioning against future financial uncertainties. Research has shown that having an emergency fund not only plays an important part in your financial health but can also significantly reduce financial anxiety.

How Much Do I Need?

Everyone is different and how much you need to save depends on your unique circumstances and goals. However, a general guideline is to save enough to cover three to six months of your regular living expenses.

Try to Get Started Now

It can take months or years to build an emergency fund. The important thing is to start saving now if you can. You can begin by putting aside just a small amount. Even a little is better than nothing. You could start with $10 or $25, or whatever you can spare, every week or month and then slowly increase the amount when you get a raise or when more money becomes available, to help you reach your target savings goal. By investing regularly, you can also take advantage of compound interest. 

Automate Your Savings

Try to make saving a habit. Setting up regular automatic transfers from your chequing account to your emergency fund is a great way to do this.

Where Should You Keep Your Emergency Fund?

It is wise to keep your emergency fund in liquid, low-risk accounts or investments (like high interest savings accounts or money market funds) to ensure easy access, without exposing your money to market volatility.

You might also want to think about opening a Tax-Free Savings Account (TFSA) to set aside money tax-free. Learn more about Types of Investments and Types of Accounts.

How do I Start?

Now that you know about the importance of building an emergency fund, you will want to create a budget to make sure you know your regular income and expenses and how much you should try to save.

And don’t forget, when life circumstances change, update your budget, as well as your emergency fund and investment strategy.

Check out the Financial Consumer Agency of Canada’s Budget Planner tool and start today. You can also contact your Financial Advisor for assistance.