How to Build an Emergency Savings Fund

With the current economic uncertainty, there has never been a better time to recession proof your finances – and having an Emergency Savings Fund is a great place to start.

According to the Angus Reid Institute, half of Canadians under 55 fear potential job loss if a recession occurs, with the majority saying they have little financial cushion to survive economic turmoil. The study also revealed that 60% of Canadians say they could not afford an unexpected expense of over $1,000.

An emergency savings fund can provide peace of mind and financial stability when faced with unexpected expenses. And while many people report having difficulty saving after several years of high inflation and high borrowing costs, building an emergency fund doesn’t require saving a lot, it’s actually more about saving consistently.

In this blog, we explain what an emergency savings fund is and how to effectively build one, so you can withstand an unplanned financial situation with ease.

What is an Emergency Savings Fund?

An Emergency Savings Fund is money that you set aside for financial emergencies, like sudden repairs to your home or automobile, an urgent visit to the vet, or an unexpected job loss. Emergency expenses are different from occasional expenses, because they are not planned for, but can still deeply affect your budget. By creating an emergency savings fund, you can help avoid going into debt when life throws you a curve ball.

Additionally, you are encouraged to keep your emergency funds in a separate bank account than the one you use for your daily transactions to prevent accidently dipping into the funds. This separate account could even be a high-interest savings account, where the money is still accessible to you in the event of an emergency, but has the opportunity to accrue interest while the funds are sitting there. Ideally the account will also have no or low transaction fees and no penalty fees when you make a withdrawal.

It is usually not a good idea to keep your emergency savings in Guaranteed Investment Certificates (GICs), because you have to wait for them to mature in order to access the money, which makes them a poor choice for unexpected expenses. The same can be said about investing your emergency savings into mutual funds or the stock market, because depending on the market value at the time of your financial emergency, you may be selling at a significant loss. It is better to keep your emergency savings in an easily accessible bank account, so if the need arises you have cash quickly.

 How to Build an Emergency Savings Fund

1. Determine How Much Money You Should Save

According to Scotiabank, individuals should aim to have 3 to 6 months’ worth of living expenses set aside in their emergency savings fund. That means that if your expenses are $3,000 a month, your emergency fund should have between $9,000 to $18,000 in it. Having this level of savings is ideal in case you lose your job or are forced to take a temporary employment leave due to illness. However, for many people, saving $10,000+ isn’t feasible and would take them years or even decades to save, which brings us to point number two – save what you can.

2. Save What You Can

Having a goal in mind for what you should set aside in an emergency savings fund can be helpful for some, but it is not the be all and end all. An emergency fund is not built overnight; in fact, it takes most people years to accumulate the necessary funds. Which is why it is important to start small and save what you can. Even if that is only $20 a month, it will add up overtime and having any savings at all can prevent a real headache if unplanned expenses arise.

Beyond creating a household budget and seeing what you can save from each paycheck, make sure to look for additional opportunities to save. If you receive an annual work bonus or some money from inheritance, that can be an excellent way to boost your emergency savings fund quickly.

3. Contribute Consistently

The best way to build an emergency savings fund is to make re-occurring or pre-authorized contributions (PACs) to your fund. Start by determining how often you would be able to contribute, whether that is weekly, bi-weekly, or monthly. Many people choose to contribute at the same frequency that they receive their paycheck, so review if that is also the best option for you.

Once you have selected the frequency, be consistent! By consistently contributing to the fund you stand a better chance of reaching your goal and not letting volatility in your daily life impact your financial future.

What’s the Difference Between an Emergency Savings Fund & a Forget You Fund?

Emergency Savings Fund – An emergency saving fund is a stash of money set aside to specifically cover unexpected expenses or financial emergencies, like sudden home repairs, emergency travel, unplanned veterinary expenses, or job loss. An emergency fund is not meant to be used for day-to-day expenses like food, fuel, or housing costs. Financial advisors generally recommend saving between 3 to 6 months’ worth of essential living expenses in your emergency savings fund.

Forget You Fund (a.k.a. an F-You Fund) – A “Forget You Fund” can be thought of as a financial independence buffer; money set aside so that you have the financial freedom to walk away from a bad job or bad relationship that is no longer serving you, without worrying about having enough money for your monthly expenses. It’s not essential for everyone, but if you’re looking to have more peace of mind that you can walk away or take risks, you should probably try to save about 6 to 12 months’ worth of income. That amount may vary widely depending on your personal circumstances, but it never hurts to have some money saved so that you can feel empowered to make the decisions you want in life.

The Importance of Emergency Savings

In times of economic uncertainty (and even in times without), it’s essential to build-out an emergency savings fund. Having money saved specifically for unplanned expenses, like a potential job loss due to a recession or the closure of the company you work for, can keep you afloat financially during hard times.

Without an emergency savings fund you might find yourself borrowing money from family or taking on new credit card debt or loans to survive an unexpected expense. Having an emergency savings fund is a great way to weather financial storms, while still staying on track for your long-term goals like homeownership or retirement.

For more financial tips and advice, check out our entire Financial Focus series here.