Life doesn’t always go as planned—and when it doesn’t, it can cost you a bundle. A broken-down car. A malfunctioning furnace. A root canal your insurance policy won’t cover. These and other unforeseen events can hit you with steep bills you weren’t expecting to pay, leaving you scrambling to find extra cash.
That’s when an emergency fund comes in handy. As a financial safety net, it provides peace and security, helping you weather a crisis that requires a quick infusion of cash. In this guide, we’ll explain how an emergency fund works, why it belongs in your budget, and how to start building one.
What is an emergency fund?
An emergency fund is cash set aside to pay for unexpected expenses. Some call it a “rainy day fund or “reserve fund.” But regardless of the term, it’s money devoted to covering unexpected bills and other financial emergencies that aren’t part of your everyday spending. Some examples include car repairs, medical bills, and insurance deductibles. An emergency fund can even help you stay afloat financially if you lose your job.
Why is it important to have an emergency fund?
Stashing a part of your paycheque into an idle account each month may seem strange. But you’ll appreciate having this financial buffer when an unexpected expense crops up. You’ll be able to cover the cost quickly and without a fuss. That’s why you can think of an emergency fund as a form of insurance: it doesn’t become valuable until you really need to use it.
But why bother creating an emergency fund in the first place? Can’t you simply take money from your regular budget to pay for an unexpected expense instead? Absolutely. But this is possible only if you have plenty of money left over after paying for essentials like housing and groceries.
Unfortunately, most people don’t have the luxury. A survey released by H&R Block in 2025 found that 85% of Canadians are living “paycheque to paycheque.” In other words, most people can’t sacrifice anything from their budget to deal with a surprise expense.
So, what does someone do if they can’t stretch their budget? Typically, they turn to credit.
During a financial emergency, the most convenient solution is to pay for the expense using your credit card or line of credit. While that solves the immediate issue, you’ll now be stuck with paying off that debt, which can be challenging to do right away. You’ll likely pay off the balance over time if you’re on a tight budget. Unfortunately, that leads to interest piling up, pushing you deeper into debt. Over time, this debt may become challenging, if not impossible, to repay.
Another benefit of an emergency fund is it discourages you from raiding into your long-term savings, such as an RRSP. If you routinely dip into these accounts to pay for unexpected expenses, you could find yourself in a financial hole. You’ll have to delay your retirement and other goals you had planned for your nest egg.
The evidence is clear: An emergency fund is a low-risk solution for dealing with unplanned expenses in the present without harming your financial future. It can help you navigate financial setbacks without ruining your budget, increasing your debt load, or jeopardizing your long-term savings plan.
How much money do you need to save?
An emergency fund should allow you to comfortably pay for minor, one-time inconveniences, such as a broken windshield or veterinary bill. It doesn’t have to be massive. However, it should also be hefty enough to accommodate a temporary income shock (such as a job loss). These adverse events can last longer and thus demand a cushier fund.
A good rule of thumb is to set aside money equal to 3-6 months of living costs. This amount will vary on your household’s monthly spending. The higher your expenses, the more you must save to act as your financial safety net. Consider also the type of unexpected bills you’ve faced in the past and your risk tolerance. This can help you decide on an amount you feel comfortable with.
How to start an emergency fund
Ready to start your emergency fund? Here’s how to create one—and how to use it properly to stay financially safe and stable.
Step 1: Determine your savings goal
The first step is determining how much you must save to ensure a healthy cash reserve. Calculate this amount by adding up your monthly living expenses. These items include:
- Rent/mortgage
- Property taxes
- Gas for vehicle
- Food
- Debt payments
- Insurance
- Utilities
Once you know this figure, multiply it by three to six months (or the number of your choice) to estimate your emergency fund size. For example, if your monthly living expenses are $3,000, you’ll need between $9,000 and $27,000 in your emergency fund. An emergency fund calculator can help you quickly determine how much to set aside.
Step 2: Determine how much you can save
Next, calculate how much cash you can commit to your emergency fund. Add all your income sources and deduct your non-discretionary expenses, such as mortgage, groceries, and utilities. Be sure to include debt payments, too. The amount left over is what you can put toward your emergency fund.
Short of the money needed for your emergency fund? If so, don’t fret. There are plenty of ways you can trim your budget to hit your target in the future. Review your essential and non-essential expenses to see if there are areas where you can scale back your spending. There are many bills you can negotiate to reduce your household expenses.
Step 3: Choose where to keep your money
Where should you keep your emergency fund? You have several choices, as shown below. Just make sure you keep your emergency cash separate from your chequing account. Otherwise, you’re more likely to use it for your day-to-day spending, which defeats the whole purpose of an emergency fund.
- Regular savings account. A standard savings account in a bank allows you to withdraw cash from an ATM and conduct transfers from your chequing account online. However, it pays almost no interest.
- High-interest savings account (HISA). A HISA offers a higher interest rate on your money than a regular savings account. Many of Canada’s large banks offer one and smaller financial institutions like EQ Bank, KOHO, and Simplii Financial.
- Tax-Free Savings Account (TFSA). This savings account offers a generous advantage: you don’t pay tax on any money earned in the account. Just make sure you don’t deposit more than your annual contribution room limit to avoid CRA penalties.
- Investment account. If you’d like to earn a higher return on your emergency fund savings, park the money in short-term investment products. A popular option is a money market mutual fund or ETF, which invests in low-risk, short-term securities like treasury bills.
- Physical cash at home. There are risks with keeping your cash reserves at home in the form of physical bills and coins. It can be misplaced, stolen, or damaged and won’t collect interest. Keeping a small portion of your emergency cash on hand is fine, though, provided you take the necessary precautions.
Step 4: Make regular contributions
Depending on your income and expenses, you could save a lot each month or only a meagre sum. If you’re in the latter category, don’t be discouraged: You can start with small contributions, increasing the amount over time. Even a modest cash reserve is valuable. And remember: being consistent is what counts for growing your fund over time.
A good target to aim for is $1,000. Spending $1,000 of your own money to pay for an emergency car repair is better than borrowing the same amount from a payday lender or using a credit card cash advance. In 2023, a Global News survey found that almost 70% percent of Canadians couldn’t cover an unexpected expense worth $1,000 or more. If you manage to save $1,000, you’re already way ahead of most people—that’s a milestone worth celebrating.
Consider setting up automatic transfers from your chequing account to avoid missing contributions to your emergency fund.
Step 5: Use your fund for emergencies
Feel free to dip into your emergency fund when unexpected expenses pop up. Just ensure it’s essential and urgent, like a flat tire, a broken toilet, or a molar that needs to be pulled. It’s worth discussing with your household how to use the emergency fund properly. The last thing you want is someone to deplete the cash reserve on something frivolous or unnecessary.
Step 6: Replenish after use
As soon as the problem is solved, take steps to refill the emergency fund. Draining the account and leaving it empty will make you vulnerable to financial shocks. You never know when another expense is going to crop up. So, prioritize replenishing the fund as soon as possible. Depending on how much you need to refill your account, you may need to cut down on expenses or find ways to boost your income.
What if debt is holding you back from creating an emergency fund?
An emergency fund is a valuable tool for dealing with unanticipated expenses. But creating one doesn’t make sense when you’re overwhelmed with debt. When the choice is between making a loan payment or setting money aside as a financial safety net, you’re going to take care of the loan first. Otherwise, you risk massive interest charges, damage to your credit, and legal threats by creditors.
If debt is holding you back from building an emergency fund, it’s time to deal with it. But you don’t have to fight the battle alone. At David Sklar & Associates, our team of Licensed Insolvency Trustees can set you down a path toward financial stability. Whether it’s debt consolidation, personal bankruptcy, a consumer proposal, or another form of debt relief, we can help put your debts behind you.
Contact us today for a free, no-obligation consultation. No matter how dire your situation, there’s a solution available to give you a fresh start.
