Budgeting, saving and investing can help keep your financial goals on track, but life often brings unexpected events that can be costly and easily derail these goals. That’s why it’s important to save some cash for a “rainy day” in an emergency fund.
An emergency fund can prepare you financially and emotionally for the unexpected, giving you more confidence and flexibility to accomplish your goals.
What is an emergency fund?
An emergency fund is a pool of money used to pay for unexpected but necessary expenses, or to cover essential expenses after a temporary loss of income. Should an emergency happen, you’ll be able to use this money to cover your losses without derailing your financial goals.
For example, an emergency fund can help you save and prepare for:
- A job loss or early retirement
- Housing or auto repairs
- Expenses related to child care or aging parents
How much emergency fund savings should I have?
For most people, maintaining three to six months of total expenses in emergency savings is appropriate. The specific amount to target depends on factors like your risk of unexpected expenses, risk of a loss of income, and other competing financial priorities.
- Your risk of unexpected expenses. For instance, do you have a home or car that might be due for hefty repairs? Do you live in an area prone to natural disasters? Do you have dependents to support?
- Your risk of a temporary loss of income. Take into account if you're part of a single- or dual-income household, work in an industry with high turnover, or have a profession with unstable income (like a gig or seasonal job).
- Your competing priorities. Having a well-funded emergency fund may be more valuable than saving for other financial goals. Alternatively, prioritizing retirement savings may be a more appropriate strategy for you if you have access to emergency funds from a line of credit.
The greater your risks, the more money you should consider saving for emergencies. That could mean maintaining more than six months in your emergency fund. A financial advisor can help you assess your specific situation to help determine how much you should have in your emergency fund.
Strategies to build emergency fund savings
Here are a few actions you can consider to start an emergency fund or save more money in the one you have:
- If you’re working, set up a direct deposit, so part of your paycheque goes directly into your emergency fund.
- Save a portion of (or all) extra income, such as bonuses and tax refunds.
- Find ways to save in your budget. For example, cancel subscriptions you don’t use or shop around to lower costs of recurring payments like internet, mobile phone or insurance plans. You can also be strategic with large, planned purchases by taking advantage of discounts and promotions
- Save a portion of any amount budgeted but not spent. For instance, if your home maintenance expenses were lower than anticipated, save the extra money in your emergency fund.
Where should I put my emergency fund savings?
It's a good idea to keep your emergency fund savings in a separate account to better keep track of them and mitigate any temptation to use them for other purposes.
We recommend holding them in cash and cash equivalents that have low risk and are easily accessible. Also, while you shouldn’t put them in investments like stocks and bonds, favour accounts that earn interest like a high-interest savings account.
When should I use my emergency fund savings?
Your emergency fund is there to support you in the event of an unforeseen financial setback. For most people, this can include:
- Job loss or other regular income loss
- Home costs or repairs
- Necessary and unexpected one-time purchases
Don't be afraid to dip into your emergency fund as needed, but always work to build it back to your target level whenever you do use the money.
Emergency fund FAQs
