How Much to Keep in an Emergency Fund

A good rule of thumb is to have 3 to 6 months of living expenses in your emergency fund.

That way, even if you lose your main source of income, you’ll have a comfortable runway to find a new one.

“Living expenses” refers to the amount of money you spend in a month for basic necessities to live.

If you’re drawing on your emergency fund, you may be spending too much or not earning enough to support your lifestyle.

Still, err on the side of too much when you’re calculating how much to set aside.

It’s better to have too much saved than not enough.

There are a lot of calculators you can use to guide you on how much you should keep in your emergency fund.

You can also look at your bank statements over the last 6 months to see how much you spent.

What is an Emergency Fund?

An emergency fund is a pool of money set aside for unexpected large expenses that you can’t cover with your regular pay cheque.

Hopefully, you’ll never have to touch it.

But if you need it, you’ll be happy it’s there.

Everyone should have an emergency fund.

It’s important to have one because you never know when you might need it.

Unexpected trip to the vet? Fridge stopped working? Laid off?

You’ll want to have some cash on hand to weather the storm and get you through the next few months until you can get back on your feet.

Your fund should be in a separate account from your normal checking account.

That helps create the divide that it shouldn’t be touched.

It also makes it easier to keep track of how much is in it.

Where Should I Put My Emergency Fund?

Your Bank’s Savings Account

This is the simplest solution for many people.

You can usually open a savings account with your bank online in a matter of minutes.

And you can transfer money in with a few clicks.

Most banks will also let you set up auto-deposits, so you don’t even have to think about building up your emergency fund.

But many banks have very poor interest rates on their normal savings accounts.

That’s why you may want to try a HISA.

A High-Interest Savings Account

A HISA refers to a savings account that typically offers a higher interest rate than a normal savings account.

The highest interest rates are generally found at Canadian digital banks such as EQ Bank or Neo Financial.

A Tax-Free Savings Account

Tax-Free Savings Accounts (TFSAs) are a super handy way to save money in Canada.

Each year, you can contribute a set amount to your TFSA.

Your unused contribution room rolls over if you don’t use it in the current year.

And any amount you withdraw is added to next year’s contribution room.

If you’re not leveraging some or all of your TFSA room for higher return investments, consider placing your HISA within your TFSA.

Any gains earned on your savings are tax-free.

Where Not to Keep Your Emergency Fund

Don’t put your emergency fund into your retirement savings account, like your Registered Retirement Savings Plan (RRSP).

Withdrawing funds from an RRSP has tax and other financial implications and may also not be readily available in time of emergency.

You should also not keep your emergency fund in an investment account.

For instance, if a TFSA is invested in the stock market — even in a diversified, low-risk portfolio — don’t use it as your emergency fund.

You don’t want your emergency fund to have any chance of losing money.

The stock market goes up and down — and so does the money inside it.

If a financial disaster strikes while your investments are down, you could be hundreds or thousands of dollars short.

Defining What an ‘Emergency’ Is

Your emergency fund exists to cover unexpected big expenses — like losing your job, or a major car repair — that you can’t cover with your regular income.

Generally speaking, you should draw on your emergency fund as a second-to-last resort.

If you can cover the amount needed with the money in your checking account, you should use that money instead.

But you should use your emergency fund before you take out a loan, or put too much on your credit card.

You don’t want to be stuck paying interest after you pay the emergency costs.

Additionally, if you can get an informal, interest-free loan from your family or friends, you may want to consider that.

That said, transactions such as these can strain personal relationships, so ensure that you set clear expectations right at the onset on how much money will be paid back and in what time period.

Strategies to Build an Emergency Fund

Move a Chunk of Money Into a Separate Account

If you have some extra cash sitting in your checking account, you can start by moving it into a savings account, like the ones above.

It helps to have your emergency fund in a separate account, so you can keep track of how much is in it — and so you don’t accidentally spend it.

If you’re able to create your whole emergency fund at once, congratulations — you’re done! But if not, here are some other options:

Set Up Auto-Deposits

Many banks and financial institutions will let you contribute a certain amount of money every day, week, month, or custom time period.

That way, you can take out however much you’re comfortable with from each pay cheque and put it into your emergency fund — without having to remember to do so.

Set Up A “Round-Up” Service

Many credit cards, investment services, apps, and banks will allow you to “round up” your debit purchases to the nearest dollar (or other increments, like $5).

The excess is then deposited into an account of your choosing.

Set Small, Realistic Goals

Set yourself up for success when building an emergency fund.

Saving money is hard, and you don’t have to make it harder on yourself.

Use the 50/30/20 Rule to figure out a reasonable amount for you to save, so you don’t get discouraged.

Make sure your savings goals are SMART — specific, measurable, achievable, relevant, and time-bound.

And take advantage of auto-deposits and other tools to make the process as painless as possible.

One trick I like to use to make myself to save more: when you spend money on something frivolous, like a fancy coffee or a new hat, put the same amount into savings.

If I have $5 to spend on a peppermint latte right now, surely I have another $5 for Future Jack.

And he’ll be much more thankful for the help than he will be for the extra calories.

Limit Your Expenses

If you don’t have a budget, now is a great time to make one.

There are tons of apps out there that make budgeting a breeze.

They’ll show you where your money’s going — it might surprise you.

Once you identify some areas to cut back on, you can allocate that money to your emergency fund.

Check out our guide to saving money fast for more tips.

If it makes you feel safer, go for it.

Most people do fine with a 6-month fund, but there’s no rule that says you can’t go longer.

Just keep in mind that the more money you have sitting in a savings account, the less you have invested in the stock market.

That’s where your money will grow.

Canadian money $5 $10 $20 $50 $100 bills for emergency fund

Frequently Asked Questions

  • Is a $1,000 emergency fund enough?
  • Should I have a 12-month emergency fund?
Jack Hauen

Jack Hauen is a freelance writer and journalist. He has talked to full-time dungeon masters about how they made D&D their full time job, and explained the "crushing sadness" of the downtown Toronto renting experience. His reporting has appeared in Canada's top publications, including the Globe and Mail, Toronto Star and National Post.

If you meet him at a party he might try to explain the ins and outs of credit card churning but will not be offended if you slowly back away. When he's not lurking r/PersonalFinanceCanada, he can often be found in the Algonquin backcountry, already gassed after the first portage of the day.