How To Start An Emergency Fund In Canada

This past winter a tree fell on our house, damaging our roof and siding. Yes, we have house insurance – but considering the deductible and possible premium increases, we decided to pay for the repairs ourselves. Thank goodness we have an emergency fund!

An emergency fund is a stash of money dedicated towards covering unexpected expenses, or keeping your family afloat should you lose your job.

If you don’t yet have one (or aren’t exactly sure what one is) – this article guides you through the 5 steps you need to follow to build an emergency fund.

Keep reading to find a detailed look at what “emergency” means; why you need to put away funds in case of an emergency; how much you need to save; and how to quickly save money using a high-interest savings accounts or TFSA.

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How To Start An Emergency Fund In Canada - 5 Steps To Build An Emergency Savings Account

What Is An Emergency Fund?

An emergency fund is a stash of money you set aside to cover major, unexpected, expenses such as:

Urgent car or house repairs
Surprise medical or dental expenses that aren’t covered by universal health care or benefits.
Job loss

An emergency fund is different from the regular savings account you withdraw money from for daily expenses or planned purchases.

It’s there to prevent you from dipping into your retirement savings and investment accounts during an emergency. It’s purpose is to act as a safety net to prevent you from taking on high-interest debt, such as credit cards and payday loans.

According to the Government of Canada, more than half of Canadians have an emergency fund. Sixty-four percent have enough money saved up to cover three months’ worth of expenses.

But if you aren’t among that group, not to worry, now is the perfect time to catch-up.

Why Do I Need An Emergency Fund?

Life is unpredictable and unexpected events can catch us by surprise – the transmission conks-out on your car, the washing machine stops working, or you lose your job!

Without money set aside to cover emergency costs, you could be forced to pay bills with a credit card, loan, or line of credit.

All these options can easily end up costing you more than the initial bill because of high interest payments. In fact, Canadians pay an average of 19.99% on credit cards and an annual interest rate of 442% on payday loans.

Choosing high-interest loans can leave you in a hole you can’t get out of! You’ll have to pay them back right away to avoid interest charges and making the required payments may leave you short – resulting in the need to borrow money.

This creates a cycle which can drown a family in debt.

Building an emergency fund for yourself makes it possible to:

pay for an unexpected expense without going into debt
avoid high-cost loans and cash advances
have financial control and peace of mind

What Qualifies as an Emergency?

An emergency is any unplanned expense that catches you and your family off-guard. Some examples of emergencies include:

Medical, dental or vet emergencies
Car accidents and repairs
Home repairs – furnace replacement, water damage, or appliance breakdown
Job loss
Property damage or theft

To help you determine if a situation in your life qualifies as an emergency, ask yourself these questions:

Is this event unexpected?
Do I have to fix this?
Is it urgent?

What Doesn’t Qualify As An Emergency?

There are many big (and expensive) events in life that may require you to dip into your savings. However, they don’t all qualify as an emergency.

Here are some examples of expenses that you can plan for without using your emergency fund money:

Property tax payments
A new baby
A new car
Weddings
Regular car costs such as oil changes and winter tires
RRSP contributions
A down payment on a house
A family vacation
Holiday gifts

These anticipated, real-life expenses should already be planned for in your budget and don’t qualify as emergency situations.

How To Build An Emergency Fund In Canada

Saving money for emergencies is different from investing in a retirement fund such as a TFSA or RRSP. Your investment money is normally tied-up in the stock market and isn’t readily available. That is good – you don’t want to touch the money you plan to live off of during retirement,

Saving for an emergency fund isn’t the same as your long-term financial planning – it’s about having a stash of money you can rely upon to pay surprise bills.

It may take awhile to grow your savings into a large sum, but you can quickly start saving money in an emergency fund by following these steps:

1. Create A Monthly Budget And Find Out How Much You Can Save

Here is a quick guide on how to create a budget. For more detailed, step-by-step, instructions see our post: How To Create A Family Budget.

Choose how you are going to track your income & expenses – budget planner, online tool or app
Collect receipts, bills and pay info for the past 3 to 6 months (or review your online banking transactions). Some amounts will be consistent each month (such as housing & car payments), while others might fluctuate (utilities, food, clothing)
Enter those numbers into the budget while being as accurate as possible (use the average amount for fluctuating bills)
Review your budget to see if there are any categories where you can reduce spending

Some Tools I’ve Developed To Help You Make A Budget

If you haven’t yet started a budget, or if you are having difficulties organizing your current budget plan, don’t worry, I have a great resource to help you. I created The Family Budget Planner to help my family, and yours, build a practical, time-saving budget plan.

I designed this budgeting tool specifically to help families manage their finances. It will help you set goals for your money, track your income and expenses, pay-off debt, monitor your savings, and, of course, create a workable budget plan.

The Family Budget Planner is created with family living in mind and includes savings and spending trackers just for the kids. I have 4 young daughters, so I wanted to make a budget planner that includes all the kid’s expenses. There is also a mini-budget sheet for children to use – what a great way to teach kids about money!

Start An Emergency Fund In Canada — The Family Budget Planner helps you to know exactly where your money is going.

2. Start Off By Setting A Realistic Savings Goal

You can start an emergency fund with very little money. It may take several months, or even years, to reach your desired emergency savings goal – but that is okay. The important thing is that you’ve started saving and can enjoy the peace of mind knowing you will be prepared for any surprise bills.

Start by figuring out what you can afford to save every week. Be it $50, $20, or $5, the important thing is to start right now.

It is normally advised that you save the equivalent of 3 to 6 months of income. This may seem like a huge task, which is why you should aim to save a small amount each week over the long term.

Here is an idea of how much you can save in your emergency fund after a year’s worth of weekly deposits. These amounts don’t include any interest you can earn.

WEEKLY CONTRIBUTION	BALANCE AFTER 1 YEAR
$5	$260
$10	$520
$15	$780
$20	$1,040

Emergency Fund Weekly Deposit Table

Tip – Pay off any high-interest debt you have as quickly as possible. Once you’ve paid off those debts, you can redirect that money towards your emergency fund.

3. Choose The Best Savings Account For Your Emergency Fund

Now that you know how much money you can put towards your fund, it’s time to choose the best place for your savings. There are two ideal choices for emergency funds in Canada – a Tax Free Savings Account (TFSA), or a regular high-interest savings account.

Tax-Free Savings Account

The tax free savings account is a good option for both short-term and long-term savings goals. The amount of money you can deposit is $6,000 per year, with a total life-time contribution limit of $69,500 (as of 2020). Plus, any amount you don’t use in a given year is carried forward for you to use in the future.

A TFSA allows you to invest in a number of different vehicles, including ETFs, stocks, bonds and cash.

The money you invest is after-tax income, meaning you’ve already paid income tax on it. However, you won’t be taxed again when you make withdrawals.

Any investment gains made in your TFSA are not subject to taxation…ever. Even upon withdrawal. If your portfolio grows well within a TFSA…that could be a lot of tax free money. TFSA’s can also earn you a higher interest rate than a regular savings account- around 2.0%.

High-Interest Savings Account

A high-interest savings account is a another option which can help you quickly save money in an emergency fund.

High-interest savings accounts pay significantly higher interest rates than standard savings accounts. You’ll find most banks and credit unions offer their own version of a HISA.

Take the time to compare different options when looking at HISAs offered through different banks. Some will charge transaction fees however there are several options that are no-fee and don’t require a minimum balance.

Consider a no-fee, digital bank option such as EQ Bank’s Savings Plus account. Your money earns a 1.50% everyday interest rate*, which is up to 40 times higher than what some big banks offer on their regular savings accounts.

There is no minimum balance and withdrawals, Interact e-Transfers®, bill payments, deposits and mobile cheques are all free – making it a great online banking choice.

Tip – Disconnect your emergency account from your debit card so you can’t make impulse withdrawals.

4. Set-Up Automatic Transfers

Prioritize saving money in your emergency fund by putting a predetermined amount of money into your account on a regular basis. The best way to do this is to pick a date and set-up an automatic transfer from your regular account into your emergency fund account.

That way you don’t have to remember to move the money each week (or month) yourself – allowing your emergency fund to grow over time.

Tip – Set up your automatic transfer on the days you get paid so you are “paying yourself first” and won’t spend the money on other things.

5. Increase Your Savings Goals

As you develop the habit of saving on a regular basis you can look for ways to increase the amount of money you are socking away each month. A simple way to do this is to find ways to cut your expenses.

To determine which expenses to eliminate, start by trimming items that are “wants” and not things that you really “need”.

Here are some ideas to save money:

make your lunch at home instead of buying it at work
bring a thermos of coffee from home instead of stopping at Tim Horton’s
take public transit or car-pool to work
choose a cheaper cable or streaming package
find a less expensive extra-curricular activity or sport for your child

For more ideas see How To Save Money On A Low Income.

Remember, making small lifestyle changes here and there can help you save a lot of money every day!