How To Build An Emergency Fund

Lisa
Author:
Lisa
Lisa Rennie
Senior Contributor at Loans Canada
Lisa has worked as a personal finance writer for over a decade, creating unique content to help educate Canadian consumers. Expertise:
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  • Real estate
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Priyanka Correia, BComm
Senior Editor at Loans Canada
As a senior member of the Loans Canada team, Priyanka Correia is committed to empowering Canadians with the knowledge they need to make smart financial choices.
Expertise:
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Updated On: July 14, 2025
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If you ever find yourself in a situation that requires a large amount of money to cover, would you have the funds readily available? If not, it might be time to start thinking about setting up an emergency fund. 

With a financial cushion to fall back on, you won’t have to scramble to find a sizable sum of money in a pinch. Instead, the money needed will be easily accessible.


Key Points

  • An emergency fund is a stash of easily accessible money that’s set aside to cover unexpected expenses, such as medical bills, car repairs, or job loss.
  • Starting an emergency fund early will give you more time to accumulate enough money to use for a rainy day.
  • Start small and work your way up incrementally to make saving for an emergency fund achievable.
  • Consider saving in an account that will help your deposit earn interest, such as a high-interest savings account.
  • Make sure the account you stash your money in allows for quick and easy withdrawals.

What Is An Emergency Fund?

An emergency fund is a reserve of money that is easily accessible in the event of an urgent and unexpected situation. Perhaps you suffered a loss of income, or have a pressing medical need that requires financial attention. Or maybe your home or car suffered some damage and require significant — and expensive — repairs. In these cases, an emergency fund can prove very useful.

As the name suggests, an emergency fund should only be accessed when there is a legitimate emergency, not when you’re tempted to go on a spending spree. 

Learn more: Is It Worth Putting Money In A Savings Account In Canada?


How Much Should You Save For An Emergency Fund?

There’s no set and universally-agreed-upon amount when it comes to how much money is enough for an emergency fund. There are people with opinions at both ends of the scale: some believe an entire years’ worth of salary is the best amount, while others think that having a few hundred dollars is all you need. Whatever you decide, just make sure it’s the best fit for you and your life.

Pro Tip
A good rule of thumb is to save at least 3 to 6 months’ worth of expenses in case you suddenly find yourself unable to work. You can also try to save about 3 to 6 months’ worth of your income. The more you can put away, the better. 

Start off with a smaller and more attainable goal, such as $500 to stash away. Then, work your way up from there until you’ve accumulated as much as you feel that you and your family may need in the event of an emergency. The idea is to start right away; the sooner you start putting money away, the faster you’ll reach your goal. 

Tiered Savings

A tiered emergency fund is a way to organize your savings into several layers. Each layer is designed to handle different levels of financial emergencies, with varying ease of accessibility and growth potential.

A tiered emergency fund can be thought of like stacking jars:

  • Tier 1: Instant access for small, urgent expenses, like a car repair or medical bill. Ideal accounts include chequing accounts and lines of credit.
  • Tier 2: For bigger costs, like job loss or illness. A High-Interest Savings Account (HISA) can be ideal for this purpose.
  • Tier 3: For major life events, like a serious illness or disability. Investment accounts that may not provide liquidity but offer high interest earnings may be suitable.

This strategy is useful because it keeps your money accessible when you need it, but allows it to grow as it sits in the account. With money readily available, you won’t have to take out a high-cost loan to cover emergencies, and it provides you with peace of mind knowing you’re covered in the event of a financial issue.

Learn more: Learn How A Tiered Emergency Fund Can Help You Manage Your Money


Importance Of An Emergency Fund

Having an emergency fund on hand means you won’t have to rely on debt or dip into other forms of savings, such as your retirement fund or investments.

If you start tapping into other pools of money that you’ve accumulated, you could be sabotaging your efforts to ensure a sound financial future. Plus, you could also inadvertently rack up debt, especially if you max out your credit card to cover a last-minute large expense. 

Instead, an emergency fund means that all those other accounts can be left alone while you quickly and efficiently handle the pressing expense you’ve suddenly been dealt with. 

Common Reasons You May Need To Access Your Emergency Fund

Here are a few examples of life emergencies that would require the assistance of an emergency fund.

  • A car accident (or any kind of accident). There could potentially be both medical bills and car repairs.
  • A job opportunity that requires an expensive move across the country.
  • Damages to your house that need to be fixed right away.
  • Serious health issues.
  • Being laid off from your job.

Learn more: Average Savings By Age In Canada


Follow These Steps To Start Building Your Emergency Fund

The idea of having to come up with a sizable amount of money may sound daunting. But if you start early and start small, you can eventually work your way up to a comfortable amount that you feel will cover the basics. 

Here are some steps to follow to save up for an emergency fund:

Step 1: Figure Out The Cost Of Your Living Expenses

Make note of all the expenses you need to cover every month, such as your mortgage, utility bills, groceries, and miscellaneous expenses. Determine which expenses you think you would need help covering, and make a tally of how much you would need to set aside every month to reach your goal by year-end. 

For instance, if the goal is to save $2,000, calculate how much you would need to put away every month and how you would go about doing that. 

Step 2: Open A Separate Bank Account

Try to keep your emergency fund separate from your regular savings and chequing accounts. Consider opening a high-interest savings account so that you can earn a little bit of interest while your money is stashed away. The longer the money stays in the account without being withdrawn, the more money you can earn. 

Step 3: Start Saving

The best time to start saving is now. To make things easier for you, consider coming up with a specific strategy on how you save for your emergency fund. Here are a few ideas to get you started:

Automate Your Savings

The idea is to put some money away every month to help you eventually reach your financial goal for your emergency fund. But rather than risk either forgetting or neglecting to put this money aside, consider automating your savings.

Ask your employer if a specific portion of your paycheque can be deposited into your emergency fund account, or see if your financial institution can set something up whereby a certain amount is transferred between bank accounts monthly. 

That way, the money will be deposited into your emergency fund account without you having to do it yourself. And by the time a year has passed, you may be pleasantly surprised at what you find. 

Put Extra Income Into Your Emergency Fund

If you come upon any extra money in the form of a bonus at work, inheritance money, or even a lottery win, consider adding that additional cash to your emergency fund account rather than spending it. 

Budget And Track Expenses

Having a budget in place helps you understand where your money goes each month and can help prevent you from overspending. Plus, it can help you save more effectively, pay down your debt, and reach future financial goals.

Creating a budget can be made easier with the use of a budgeting app, which can help you plan, track, and manage your income and expenses while staying in control of your finances, all from your mobile device.

Learn more: Best Budgeting Apps In Canada


How Much Will You Save?

The amount you can potentially save depends on how much you put away each month, when you started saving, and how long you save for while remaining diligent with your efforts. To help you understand your saving potential, here are a few examples:

AmountMonthsTotal Saved
$50/month12$600
$100/month24$2,400
$200/month60$12,000
$500/month120$60,000

Tips On Starting And Managing An Emergency Fund

If you’re still worried about the details of starting an emergency fund then here is some essential advice that should help you make the right decisions for your situation.

  • Set Realistic Goals: Start with a more attainable amount and work your way up.
  • Work Your Way Up Incrementally: Once you’ve started saving and you’ve got a base amount, then work towards about 3 months’ worth of expenses.
  • Don’t Compare Yourself To Others: Everyone’s situation is different, which means everyone’s emergency fund will be different. So, don’t worry about what others have and instead focus on what you need and what will work best for you.
  • Leave Your Fund Alone: Once you start saving, do not touch it. Most people don’t have an emergency fund because they spend it; keep yours in the bank until a real emergency happens.
  • Invest Wisely: Make sure your emergency fund is working for you and not just sitting in a bank account doing nothing. Choose a high interest savings account so you can benefit from the interest it’s earning.
  • Don’t Ignore Your Debt: Starting an emergency fund is important, but being debt-free is also essential. If you have a lot of debt, then work on paying it off at the same time you’re saving for your emergency fund.

Starting an emergency fund today will put you one step closer to being financially responsible for both you and your family.


Should I Pay Down My Debt Or Start An Emergency Fund First?

Saving for future financial goals or an emergency expense is always important, but ignoring your debt will leave you with unnecessary interest charges. So, which should you focus on first: paying down debt, or starting an emergency fund?

  • When To Prioritize Debt Repayment: If you’re carrying high-interest debt, like payday loans or credit cards, and you already have some savings, consider tackling those balances first before adding to savings. The more time you have until retirement, the more it makes sense to pay off costly debt early.
  • When To Prioritize Savings: If your debt is low-interest or can be consolidated, it might be better to focus on contributing to savings accounts like a TFSA or RRSP. This allows your money to grow tax-free while taking advantage of interest.

Learn more: How To Save Money And Pay Off Debt


Final Thoughts

Life can throw a curve ball without warning. If you’re ever caught in an unexpected situation that requires a large sum of money to cover a major expense, having an emergency fund on hand can come in handy. Start saving right now, and within a few months, you should have a comfortable amount of money to fall back on. Keep going until you’ve got enough saved to sustain you in an emergency situation.


Emergency Fund FAQs

Where should I keep my emergency fund?

You should keep your emergency fund money in a separate account from other money, which is why opening up a new account is recommended. Further, the account that you keep the funds in should be easily accessible. That way, you can withdraw the money at a moment’s notice. As mentioned, consider adding the funds to a high-interest savings account so you can earn interest while the money sits there.

Can I keep my emergency fund in mutual funds, stocks, or ETFs?

Investment vehicles like mutual funds, stocks, and ETFs may be great to help you build wealth over time, but they’re not suitable for an emergency fund. You won’t be able to withdraw the funds right away, nor would you be able to take the money out without some sort of repercussions. 

Should I keep adding to my emergency fund once I reach my goal?

Once you’ve reached your goal for your emergency fund, you may want to use any extra money to invest. That way, you can make your money work for you and grow your wealth.  Even though you may be stashing your emergency funds in a high-interest savings account, there are other investment vehicles that can earn you much higher returns, though the money will not be as liquid as they are in a traditional bank account. 

What is a good reason to use my emergency fund? 

There are several scenarios that would warrant the need for an emergency fund, such as a medical emergency, car repairs, home repairs, or job loss.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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