Setting up an emergency fund

From: Financial Consumer Agency of Canada

Why emergency funds are important

An emergency fund is money you set aside to pay for unexpected expenses. You may have to deal with an emergency or an unexpected situation at some point in your lifetime.

These surprises usually don’t give you time to adjust your budget.

Some examples include:

car repairs
urgent visit to the veterinarian
job loss
health problems that prevent you from working

Don’t confuse unexpected expenses with occasional expenses such as school supplies, winter tires or holiday expenses. Occasional expenses should already be planned for in your budget.

Setting up an emergency fund helps you to:

handle an unexpected expense without getting into debt
avoid high-cost loans (such as a payday loan or a credit card cash advance)
have financial control
have peace of mind

Tips to set up an emergency fund

Use the following tips to set up an emergency fund.

Open a savings account

It’s important that you choose the right type of account to build your emergency fund. It should be easy to access your money quickly in case of an emergency.

You should look for a savings account that:

is separate from the account you use for day-to-day transactions
has no or low transaction fees
allows you to make withdrawals without penalty
generates interest on the money you save

Contact your financial institution to find out the different account options they offer. Make sure the account you choose will allow you to meet your goal to build an emergency fund.

Use the Account Comparison Tool to find the savings account that best suits your needs.

Start by saving a realistic amount

It can take months or years to reach the desired amount for your emergency fund.

It’s better to start with a small amount so that you don’t get discouraged.

Start by figuring out what you can put aside every week. Whether it’s $50, $20, $5 or some small change, the important thing is to start right now.

Ideally, you should try to save the equivalent of 3 to 6 months of your regular expenses. You can also aim to save 3 to 6 months of income. Both methods work, so choose the one that is easier for you.

These amounts can sometimes seem out of reach. That is why you should save gradually.

Saving a small amount on a regular basis can make a big difference in the long term.

Figure 1: The progression of various savings amounts

Figure 1: Text version

Amount of savings per week	Total amount of savings per year
$20	$1,040
$15	$780
$10	$520
$5	$260

The savings amounts in this example are for illustration purposes only. They don’t include the interest you may earn or take into account any tax implications.

at $5 a week, you’ll have $260 after a year
at $10 a week, you’ll have $520 after a year
at $15 a week, you’ll have $780 after a year
at $20 a week, you’ll have $1,040 after a year

Use the Budget Planner to include emergency savings into your budget.

Make it a habit

Incorporate savings into your daily habits.

Try these few tips:

drop any loose change into a container every time you get home
create a savings reminder on your smart phone or computer
circle your savings dates in advance on your calendar
put sticky notes on your desk, mirror, or refrigerator to remind yourself to save

Automate your savings

Choose a savings amount, date and frequency to build your savings. Then, set up an automatic transfer from your regular account to your savings account.

You can set up your automatic transfer on the days you get paid. This way, the amount saved will be transferred as soon as your paycheque is deposited into your account.

Eliminate an expense and save the amount

Eliminate some expenses and add these amounts to your emergency fund. This won’t affect your current budget and your fund will grow faster.

To determine the expenses you can eliminate, identify the difference between your needs and wants.

Need: a necessity, an obligation, something essential
Want: a desire, a wish, something non-essential

To eliminate unnecessary expenses:

bring your lunch to work instead of buying it
make your coffee at home and bring it to work
use public transit instead of your car
eliminate one non-essential food choice from your grocery list
use discount coupons, cashback offers and take advantage of specials

Depending on your current habits, you could save a lot of money every day.

Learn how to make a budget and eliminate expenses.

Review your goals

Review your financial goals on a regular basis. Your family, personal or work situation may change, and this may affect your budget.

Even minor changes can have an impact on the time you’ll need to reach your emergency savings goal.

These changes may include:

a new child
a new house
an increase in your property taxes
an increase in electricity costs

When these events occur, modify your budget accordingly so that your emergency fund remains a priority.

Increase your emergency fund

Take advantage of every opportunity that can help you increase your emergency fund. Deposit any additional amount into your savings account whenever possible.

For example, you may get extra money if you:

get a tax refund
get a pay raise
sell something (such as a vehicle, jewelry, furniture)
get money as a gift
get a bonus at work

When you finish paying off any type of loan, it’s a great opportunity to increase your emergency fund. Take the money you were putting towards your monthly payments and deposit them into your savings account instead.

These payments are already in your budget. This is a great way to put the newly available money to good use.

Tips to help you use an emergency fund

Before using all or part of your emergency fund, determine if you’re really experiencing an emergency. Maybe the expense is something you can put off until you’ve had the opportunity to save.

If you’re not sure, go back to your list of needs and wants. An emergency is a major and sudden need that’s not part of your current budget and that’s unplanned.

When it’s truly an emergency, don’t hesitate to use your emergency fund. The purpose of an emergency fund is to avoid having to use other expensive credit options.

While your emergency fund should be easy to access, don’t let yourself be tempted by this money. Leave it intact for a real emergency.

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Date modified:: 2025-03-28

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