How and Why You Should Start an Emergency Fund

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How and Why You Should Start an Emergency Fund

Written by Lisa Rennie
Fact-checked by Caitlin Wood

How and Why You Should Start an Emergency Fund

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Budgeting Emergency Fund Personal Finance

If you ever find yourself in an unanticipated 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.

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 and not when you’re tempted to go on a spending spree. 

Importance Of An Emergency Fund

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

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. 

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.
Budget Breakdown

How Much Should You Save For An Emergency Fund?

The consensus is everyone thinks having an emergency fund is essential, but that’s where the agreement ends. No one can agree on how much money is enough. There are people with opinions at both ends of the scale, some believe an entire years’ worth of salary is the best amount but others think that simply having around $1000 is all you need. Whatever you decide, just make sure it’s the best fit for you and your life.

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. 

Steps To Save For An 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:

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. 

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. 

3. Start Saving

It sounds easier said than done, but now is the time to start saving. 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 manually do it yourself. And by the time a year has passed, you may be pleasantly surprised at what you find. 

Put any 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. 

Temporarily cut down on your spending

If your spending habits can be a little excessive, consider scaling back on your expenditures to open up more opportunities to save. You won’t necessarily have to do it forever, but just long enough until you’ve accumulated enough to cover a few months of income or expenses. 

Check out these budgeting apps to help you save and track your money. 

Tips On Saving For 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.

  • $10,000 is an unrealistic goal for most people, start with a more attainable amount like $2,000 to $3,000 and work from there.
  • Once you’ve started saving and you’ve got a base amount of around $2,000 then work towards about 3 months’ worth of expenses.
  • Everyone’s situation is different which means everyone’s emergency fund will be different, don’t worry about what others have and instead focus on what you need and what will work best for you.
  • 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.
  • 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.
  • Starting an emergency fund is important but being debt free is also very important. 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.

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 a loss of a job.

Final Thoughts

Life can throw us curve balls 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.


Rating of 5/5 based on 2 votes.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers. She specializes in personal finance, mortgages, and real estate. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. She enjoys sharing her knowledge and experience in real estate and personal finance with others. In her spare time, Lisa enjoys trying funky new recipes, spending time with her dog, and of course, revelling in the joy of family.

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