How Much Should An Emergency Fund Be For Me?

Determining how much an emergency fund should be if you are just starting out can take some time. Let us walk you through the steps to help you answer this question. 

Assess Your Financial Situation

You can’t start planning until you know where you are today. Take a close look at your income, expenses, and financial obligations. Calculate your monthly expenses, including your rent or mortgage payments, utilities, groceries, transportation, and any other recurring payments. Consider any outstanding debts or financial commitments you have, including student loan repayment or credit card debt. Once you clearly understand your financial obligations, you can move on to setting financial goals.

How much should an emergency fund be if you are in debt?  Maintaining the ability to cover all our financial obligations, including debt repayments, means that we can weather the storm without adding MORE to our debt load. 

Set Your Financial Goals

Setting financial goals is crucial in determining how much your emergency fund should be and how long it will take you to build it.  Think about all of your short-term and long-term goals, such as homeownership, retirement, starting a family, or that new car you’ve got your eye on. This FREE worksheet can help you clarify your goals and timelines.

Why are we talking about these other goals? Remembering the bigger picture when considering an amount to aim for in your emergency fund is important. Including your other financial goals in your EF amount will help you keep on track and not derail your progress!

What should be included in your Emergency Fund Calculation?

You should include any expenses you require to live and run your household and any financial commitments like debt repayments and personal financial goals. 

For my family, we decided on six months’ worth of expenses for our emergency fund because that is what would give us the most peace of mind.  For context, we are a  married couple with one child, and we are homeowners. Here is what my family decided to include in our EF Calculations: 

• Food
• Mortgage & property tax
• Water, utilities, internet, phones
• Home, Life,  and Car insurance
• Gas and other transportation costs
• Daycare
• Pet Care
• RESP and RRSP Contributions
• Money for social events & gifts
• Plus a bit extra for shopping needs and miscellaneous.

Why did we include all those things and not JUST our basic monthly bills? If you have only a barebones EF – and you end up having to live on it – you’ll be stretched so thin that not only will you be trying to get through an emergency, but you won’t have any peace of mind or flexibility.  An emergency on its own is enough to deal with. 

Now you have listed all the things you want to include in your EF. Once you have that number determined, calculate that amount by the number of months that will make you feel most comfortable. Having 3 – 6 months saved up is the general recommendation for a good emergency fund. This will be your overall EF goal amount.

Set a Budget to Help You Save For Your Emergency Fund

Developing a budget is essential to allocate funds towards your emergency fund systematically. Tracking your expenses is a game changer in the budgeting world. It can help you identify areas to cut back and save or reprioritize your spending.

If you haven’t budgeted before, or are unfamiliar with how to make a budget, I can give you some tips on how to make a budget you can stick to here.

You’ll need to add a line item for your emergency fund savings to your budget. How much to save each month depends on your Goal EF amount. 

• Take your overall goal, divide by the # of months until you want to have your goal met.  Do you have that much room in your budget to start saving that amount each month? Work that amount into your budget. 
• If there is no room right now, look for ways to decrease expenses and increase your income to make your EF savings fit the budget. or extend your goal date to lessen the monthly contribution.
• Whatever you do, MAKE IT A PRIORITY.  

Pay Yourself First

Canadians who don’t have an emergency fund may feel anxious or overwhelmed with not knowing where or how to start. If you don’t have an emergency fund, please make it a priority in your budget to start working toward your goal. Even if you can only afford $5 per paycheck, commit yourself to starting there and find ways to increase each time you get paid. Paying yourself first is a proven strategy to help build your savings. That means you treat your savings as if it were a bill payment that is due – and you save first before you spend any of your money. 

One easy way to get started on this is to “set it and forget it.” You can automate your savings goals, so your contributions come out of your account automatically, and you don’t need to think about it at all. Setting this up with your online banking portal or app should only take a minute. Ensuring you consistently contribute to your Emergency Fund is more important than how much at first. Get into the habit of paying yourself first by contributing your savings before you spend any of your pay.

Where to Keep Your Emergency Fund

When working toward a large financial goal, it’s best to utilize tools that are going to help us reach that goal faster. What tool does not help? Your bank’s regular savings account. Why? It’s likely paying you nothing in interest, or 0.01% if you are lucky.

Where should you keep your emergency fund instead? A High-Interest Savings account is your best bet. With higher interest rates these days, you can make up to 5% in interest in some places. We strongly support finding a high everyday rate account, not going somewhere that only tries to suck you in with a short-term promotional rate. Some of our favourite Canadian High-Interest Savings accounts are listed here. 

Is it ok to invest your emergency fund? 

You do not have to optimize every single dollar. 

One common mistake I often see that comes from that desire to optimize is when people Invest their emergency funds. They feel like they are missing out on an opportunity to make a lot of money by keeping their emergency fund in a High-Interest Savings Account, and they invest the money. Investing your Emergency fund is a bad idea for several reasons.

• All investment carries risk. You don’t want to risk losing your emergency fund in a stock market downturn when you need it most.
• You may need your money immediately, and it may take a few days to liquidate your investment and transfer the cash from your brokerage account to your bank account.
• You want to opt for a safer investment like a GIC, but that requires you to lock in your money – leaving your dollars inaccessible when you may need them most.

Using Your Emergency Fund

Your emergency fund is absolutely there to be used by you in emergencies. Knowing what counts as an emergency from the outset will help you NOT waste it on wants – but on true emergencies. 

I have heard of people feeling extremely guilty or shame-riddled at having to use their emergency funds. They didn’t want to touch it; they felt like they had failed somehow.

Please understand that this money is to be used in an emergency. Be grateful it was there to help you when needed. Thank yourself for being such a good planner and having it there to protect you!

Replenishing Your Emergency Fund

What should you do if you have to use your Emergency fund? Make sure to rebuild it after you dip into it for your emergency. So it can do its job for you again in the future when needed. Not refilling it when you have depleted it (partially or fully) pulls that financial security rug out from under you that you worked so hard to build up. So do yourself a favour and make sure to reprioritize getting that fund built up again. The last thing you want to do is fall back into a financially vulnerable position and encounter another setback,

Achieve financial peace of mind through an Emergency Fund

Many people underestimate the size of the emergency fund they need. Not you! How much should an emergency fund be is no longer a question you will ever google again. You know how to estimate your needs for an Emergency fund goal, where to open an account, and how to start building toward your goal on autopilot.

With a significant emergency fund in place, you won’t be left in a financially vulnerable position, and you will never be thrown off track or forced into debt to deal with unexpected situations as they arise. You will be prepared because you have worked toward a goal and, given your EF money, one of the most important jobs: protecting yourself.