How to Save Money » Budgeting

How to Build an Emergency Fund

How to Build an Emergency Fund

So you’ve paid off all your debt and want to start to build your savings and investments? Before you start working on building up your RRSP, your first savings priority should be an emergency fund. If you want to protect yourself in the even of financial setbacks, it’s a good idea to have an emergency fund that works for you. From paying a high deductible on your insurance policy, to providing you with a way to pay bills if your hours at work are cut, an emergency fund can be very helpful.

I’ve mentioned previously that I don’t believe an emergency fund makes much sense if you still have debt. By paying down debt on a credit card or credit line, you then free up that balance, which could be re-borrowed in the event of an emergency.

At the same time, paying down your debt, especially if it is high-interest debt, allows you to stop wasting money on interest payments. The longer you are in debt, the less money you have to build up your own wealth. One of the best things you can do for yourself is to get rid of high-interest debt as soon as possible. Once that is done, it’s time to build an emergency fund.

What Is an Emergency Fund?

An emergency fund is a reserve of cash that you set aside for unexpected expenses. This usually applies to things that break: your car, your appliances, your furnace or other items in your home – or maybe even an arm or leg. (Sometimes you have to pay for certain types of casts or splints.)

You may also want to build an emergency fund to cover higher future mortgage costs. If you are on a variable rate, you may want to have a cushion in case rates rise. If you have a very low fixed rate mortgage, you may have to renew at a higher rate later. It pays to use a mortgage calculator ahead of time to make sure you’ll be able to cover your new payments.

Why Should I Have an Emergency Fund?

An emergency fund can give you peace of mind and keep you from incurring debt and the extra costs that come with it. You will avoid both stress and interest.

Should I Pay Down Debt or Build an Emergency Fund First?

There is some debate on this issue, but I come down on the side that says you should have at least a minimum emergency fund of $500 – $1000 before you attack your debt. This will keep you from incurring more debt if your dishwasher breaks down or you blow a tire.

If you know your washer and dryer are on their last legs, you may want to save enough to cover a new set. (See my article on Preemptive Purchases.) If your car is likely going to need brakes over the next year, you can save for that in advance too. Once you have paid down your consumer debt, I would suggest padding your emergency fund to protect against job loss.

How Much Should I Save in My Emergency Fund?

Again, there’s a lot of debate over how much you should save. In the end, it’s your call. Once you have saved the minimum amount ($500 – $1000) and paid down your consumer debt, the exact amount you need to save depends on your situation.

If you have a very stable income, you may only want to save enough to cover expenses for a month or two. If your income is variable or you are worried about losing your job, you may want to build up a 6-month cushion, or even more if it helps you sleep at night.

Is your home due for a new roof? What is the life expectancy of your vehicles and appliances? How accident/illness prone are your kids? If you have young children who tend to get sick frequently, you can incur elevated costs for prescriptions and/or over-the-counter medications.

Obviously, you can’t predict every possible expense. That’s sort of the point of the emergency fund. But you can arrive at a better ballpark figure if you have a good handle on what might go wrong. Every year when I set up our budget, I ask my husband for rough figures on car care and home maintenance expenses and then I budget a little above that just in case.

Where Should I Keep My Emergency Fund?

Your emergency fund needs to be easily accessible. We basically have two emergency funds. We keep the largest portion in a high-interest savings account. We also keep a cash cushion on hand at home in case we can’t make it to the ATM (or the ATMs are down) or we just need some cash for unexpected expenses like field trips or fundraising for the kids’ schools. I track this cash and it gets replaced as soon as possible.

We’ve held a number of garage sales over the years and I usually use the proceeds of those for the cash portion of our emergency fund. It helps to keep some smaller bills, loonies, and toonies on hand from these sales for school expenses like those mentioned above. (Exact change is often required.) I can’t tell you how many times I’ve been grateful for our garage sale cash box when I’m rooting around for $3.75 for a hot dog day or some other event.

When Should I Use My Emergency Fund?

Your emergency fund should be reserved for true emergencies. An unexpectedly good deal on a vacation package doesn’t count. If you use your fund for things like that, it won’t be there for you when you really need it. If you’ve been around awhile, you know that Murphy’s Law says that you’ll have a fender bender or some other bit of bad luck right after you’ve booked your cruise.

Set some rules for yourself and follow them. Write them down if you don’t trust yourself or your significant other to stay disciplined. When you want to tap your emergency fund, whip out your list of rules and see if your proposed purchase fits. If it does, go ahead and spend the money. If not, you’re either going to have to do without that item or wait until you’ve saved enough to buy it without debt.

If you need to use some of your emergency fund, take some time to re-evaluate your position afterward. You’ll probably want to take some time to replace that money so that you’ll be ready for the next emergency.

Why an Emergency Fund Matters

If your debts are paid off, an emergency fund acts as a form of insurance. The money is there if you truly need it, without having to go into debt or withdraw from your RRSP.

Most often, emergency funds are described as a safety net in case of job loss. Another good use for an emergency fund would be to use it for your home or auto insurance deductible. Having the money saved in advance gives you the ability to raise your deductible to reduce your insurance premiums. This saves you money on premiums each month — money that you can put into your emergency fund to earn interest.

Building Your Emergency Fund

It’s likely that you’ll need to save up to reach your emergency fund goals, so how much is the minimum you should have in your emergency fund? Rules of thumb suggest that you save up anywhere between 3 and 12 months’ worth of expenses. I think a true bare minimum would be either enough money to cover one month’s expenses or your insurance deductible, whichever is highest. Maybe this is $1,000 for some, while it might be much more for others.

You might have to start small to reach your initial goal, and that’s ok. The important thing is to get in the habit of setting money aside. Put aside as much as you can until you hit your bare minimum. Use a high yield account so that you can make the most out of your interest yields.

From that point, keep adding savings from each pay cheque until you reach an amount you feel comfortable with. Once you have the total amount saved in your emergency fund, you can practically forget about it until the need arises.

8 Ways to Creatively Build an Emergency Fund

Finding money in already tight budgets might feel overwhelming, but with creativity and determination, you can build up your emergency fund before a crisis hits.

1. Set Up a Separate Savings Account

Create a separate account that offers high-interest (perhaps a Tax Free Savings Account) and faithfully put your deposits there. Keeping this fund separate will minimize the temptation to withdraw the money for non-emergencies.

2. Sell Things

Start by decluttering to find things to sell. Big things. Little things. Post them on Kijiji or Craigslist or on a local facebook page. Host a yard sale to sell many items quickly.

3. Start Small

Calculating the thousands of dollars to put in an emergency fund can be overwhelming. But tucking away an extra $20 or $30 here and there will absolutely add up over time.

4. Save Your Change

For a season, make a rule that you won’t spend any coins. Tuck them in a jar and deposit them towards your emergency fund once a month.

5. Treat It Like a Bill

Every month we receive bills for utilities, property tax, mortgage payments etc. These have to be paid on time, without thought. Send yourself an emergency fund bill each month, and pay that faithfully. Another option is to set up an automatic withdrawal, so the money comes out regularly.

6. Spend Less

I love the Duggar family’s saying: “Buy used and save the difference.” Challenge yourself to spend less in at least one budget category, and direct the money you saved towards your emergency fund. If you typically spend $600 on groceries, but you use price matching, meal planning and coupons to get that down to $400, you will have $200 to tuck away. I also love doing this with air miles cash. If I buy $100 in gas with Air Miles, I can put the money I saved towards an emergency fund.

7. Make More

Money is mathematical not magical. To fund an emergency fund creatively you either need to spend less, or make more (or both). Brainstorm ways to make more. Can you ask for a raise? Take on an extra part-time job? Think outside the box with friends who inspire you. Perhaps freelance your skills as an editor, writer, photographer – the sky is really the limit.

8. Find Inspiration

There are many amazing stories on the internet explaining how people choose to live frugally to pay down debt and create an emergency fund. If your focus waivers or you feel discouraged, spend some time looking for inspiration.

Tips to Build a Better Emergency Fund

1. Start Small

Many of us feel overwhelmed when we listen to experts who tell us that we need nine months’ worth of expenses saved up. If your expenses total $3,000 a month, that’s $27,000 you need! Focusing on big numbers like that can be discouraging, and lead you to not set anything aside at all.

Instead, start small. Focus on what is doable right now, rather than the end result. Go through your budget, and determine how much you can set aside right now. Once you’ve done that, start putting it in an account. I use the Tangerine TFSA, and you can get 2.4% interest for 6 months and up to $50 in bonuses through this link. Then, consider ways you can increase what you set aside until you reach your goal.

2. Consider Accessibility

Your next step is to consider accessibility. You want to be able to get to your money when you need it. Tying it up in an investment account can be problematic, especially if you run into a true emergency that requires that you get your cash quickly. Sometimes, this means that you give up some of your return so that you can get to your money quickly. An account connected to an ATM card, or an account that is linked directly to a checking account with debit access, are good choices if you want immediate accessibility.

It’s also possible to consider different types of emergency setups. You can keep part of your fund in an immediately accessible account, and then keep the bulk of it in an account that is a little harder to get to, but offers better returns. For instance, you can keep a smaller amount in the local bank, where you can use it immediately while you wait for a larger amount to be transferred from an investment account after you sell some assets.

3. Look for High Yield and Other Benefits

Now that you know which accounts are quickly accessible, it’s time to try and get the highest possible return that you can. Unfortunately, savings accounts are known for low yields. When you have money that is basically safe, and easily accessible, it’s not going to pay you a very high yield. You can turn to high yield accounts to help ease some of the pain, by giving you the best possible return for your money.

If you are building an emergency fund portfolio, with different types of accounts, you can create a GIC ladder for better yields. You can also consider a TSFA, which comes with tax benefits, as well as the possibility of better returns.

Make Sure You Can Access Your Money When Needed

You want to be able to get your money out quickly in the event of an emergency, so make sure that the money is in an accessible account. A high interest savings account would be a good choice, possibly within a TFSA if you have available contribution room. However, it’s important not to have this money too accessible. A debit card linked to your emergency fund is usually not the best idea.

Keep in mind that this account is for true emergencies, not for a car, vacation or Boxing Day deal. Of course, now that you have an emergency fund, you can now start saving in separate accounts for these items as well!

Start Your Emergency Fund Today

The best time to start was yesterday. The next best time is now.

That’s one of my favourite quotes and it definitely applies here. Sure, you should have an emergency fund, and you may have even regretted not starting one yet. So why not start today? With a $100 deposit, you can get started with Tangerine and setup automatic savings with them. As a perk for taking action, you can get $50 in bonuses and a 2.4% interest rate, so open an account and protect yourself from financial disaster.


  1. threadbndr

    I divide my efund into several ‘buckets’ – there’s a job loss bucket, and a deductibles bucket and a car/house emergency bucket. By keeping the accounts seperate (I love ING for this – they let you have as many linked accounts as you need), I don’t feel like I’m starting over if I need to tap one of the funds.

    For example, I just bought a new to me car and a big chunk of the car budget was added to the down payment (since the new car is under warranty I don’t need much in that bucket right now). But my job loss, insurance deductible and house funds were not impacted at all and grew at their normal rate this month.

  2. Tom Drake


    That’s a good idea, and it stops the temptation to use funds for something other than their purpose!

  3. Giselda

    In reply to Threadbndr, that is a great bit of information you gave. I love ING as well, it is a great way to save, but I am wondering, how do you get all the accounts, like what you mentioned? For me, this would be a great idea.

  4. Allison

    Loved this post! It’s so important to establish an emergency fund. You can never fully anticipate what you’re going to be spending your money on over the next month, six months, year….It’s also important to protect that emergency fund, however. You may reach your goal of saving x dollars, but then feel the pull to divert it to investment or spending. I’ve found this really helpful blog that offers tips on how to protect your emergency fund

  5. Financial Cents

    Well said Tom. Emergency funds are essential. My wife and I try to keep a few thousand handy should those “what ifs” in life materialize. That said, I hope they don’t 🙂

    My Own Advisor

  6. Andrew Hayes

    Good post. Quite often, people who don’t have an emergency fund see the idea of having to save up money as some form of punishment – after all, money put in a savings account and locked away is money that can’t be used to spend. Actually, it’s quite the opposite – having an emergency fund means that you do have room to breathe. You don’t have to completely panic if your car breaks down or if you lose your job or if you suddenly need to replace a hot water heater.

    It does not have to stay in cash either- you can use a part of it to put into diversified investments like stocks and listed property funds

  7. Bryan Jaskolka

    I do like this post however, I disagree with the idea of not having an emergency fund if you’re still in debt. It’s often those in debt who can’t get money if something goes wrong. After all, like you mentioned, if you’ve paid off your debt, there’s a very good chance that you’ll have a credit card or line of credit kickin around that you can tap into. And often, people have gotten so far into debt that while they still owe the money, their credit cards are no longer valid – and they won’t have one that is for another 5-7 years until they can re-establish their credit. Why not still save up an emergency fund, pay off your debt at the same time (yes it will take longer but being debt-free is a marathon, not a sprint for many) and still be protected in the meanwhile?

  8. Keith Guinchard

    I agree with Bryan. As a former CFP and then later a non- profit debt counsellor I saw both sides of the story. Focusing entirely on debt repayment without any emergency savings leaves you wide open for the next emergency. It can take years to pay off a large debt load and in the meantime life happens. Without any money set aside you end up using your cards again. The emergency fund does not have to be large, enough for example to cover a new water heater or car repair ($1,000).

  9. Simon @ Modest Money

    Am still in the process of starting off my emergency fund starting with the bare minimum of $1000 (As per Ramsey’s advice). I can certainly agree with you…its something you do slowly and steadily over time. I have taken on a side job to make the whole process a bit fast…its unnerving rolling minus an e-fund given that things tend to break when you least expect them to.

  10. Michael

    I would suggest also putting money that you don’t need for a while, such as a year, and transfer it to a savings account each month. So it isn’t there to spend and you won’t miss it going out of your account. Then you won’t panic when the item you need to pay for comes up in a year’s time. (Such as road tax.) You’re also less likely to have to dip into your emergency fund doing this.

  11. RichUncle EL

    Great ideas, I have had good luck with building barriers to access the money and use those accounts to build my emergency funds.

  12. Marcia

    I remember a few years ago, wondering how in the world I was going to save $1000 (Dave Ramsey’s idea). Then I suddenly came into two surprises and there it was! However, even starting small has great dividends in the stress department! I know there is money in back of me and that makes a difference. All I can say, is build it and then get on with paying off the debts!
    I’m learning about the ladders for later!

  13. Susan J

    Sorry an emergency fund needs to happen debt or no debt. I can’t even imagine not having one and having to put on credit a car repair etc. I’d say then like any budget once you are debt free ante up and make more effort in saving, etc. Also life events play into this as well helping kids through post secondary education and their weddings. So here is another thing which happened to our family my husband came down with a life threatening illness and is now permanently disabled unable to work ever again. So I am so happy that our household always believed and used saving for an emergency otherwise we would have been screwed. And like others have suggested we have multiple accounts through our CU which we label for our specific categories and have easy access. This was truly the best thing we ever did and could always pay off our credit card each month. SO I would suggest this post and your advice is good but not the best considering what a life changing illness can do! Believe me.

  14. Kathy Your Net Worth Manager

    Paying down debt can be a long slow process, I have seen people with no emergency fund then put an emergency back on the credit card and its like ” why bother we get no where” an excuse to stop working on the debt. Mathematically Tom is correct, however psychology and behaviour come into play so I would say know your self and how you would react.
    I also find people have a weird perception of ” emergency” new tyres, frozen pipes, teeth etc are not emergencies we know they happen. I call that the life happens account. Emergency is a house fire, sudden job loss, catastrophic, unpredictable things.

  15. Pamela

    Great post Tom! My husband and I recently paid of $120,000 of student loan debt (combined) in about 2.5 years. It was tough. We are currently in the process of building our 3-6 months worth of emergency fund. We are starting to aggressively put in $10K (in the next 3 months) and then redirect our money to other funds (ie. education fund, starter baby fund etc) while slowly building it up to $20K over the next 2 years.
    The GIC ladder is a great idea.
    I would recommend to have some savings before going aggressive on the debt. We had about $10K in savings before we starting paying off our debt, the Dave Ramsey way. It helped out a lot.We depleted that amount over the 2.5 years it took us to pay off the $120K. I can’t say that it was all for emergencies, but it definitely helped.
    Great post!!

  16. Tracy @ Financial Nirvana Mama

    An easy peasy way is to automate the savings rate. Set a direct transfer from your account to another account that you can’t touch or see all the time. This has been the easiest way for me to save money for different purposes including emergency money.

  17. Derek @ MoneyAhoy

    I agree with tip #1 as a good starting point. You do not need a lot of money to get an emergency fund started. You can begin with just a penny and build it from there. The main thing is just to get started saving something today!

  18. Nathan @ Investment Hunting

    I am a big believer in emergency funds. Having gone through a few rough financial times in my life, I now like to keep a large emergency fund. I maintain 12-months expenses in savings at all times. I could make more money placing this money into investments, but the piece of mind I have knowing that I have 1-year of expenses covered is the mindset safety I need invest the rest of my money.

    I like to pay off debts, then continue paying myself the same amount. For example, I’m paying off my latest car in three months; once paid off I will pay the same amount monthly into my savings or brokerage account.

  19. Dannielle

    I’m trying to convince a work mate to create an emergency fund. I’ve told her time and time again that she just needs to start with $100 and go from there. If she and her hubby contribute $200 a month, that is $2400 a year and $24,000 in ten years!

  20. Jason

    I don’t agree with using a GIC Ladder. If you are building an emergency fund, why lock up you money? If you need the money, hence, emergency fund, you now need to wait for the GIC to become available. I like the idea of using a Tangerine Account instead. You get more reward for less risk and the money is available when you need it.

Leave a reply

Your email address will not be published. Required fields are marked*