5 Tips To Set Up An Emergency Fund

July 24, 2023

Assuming you lose your job today, fall sick, or have some urgent repairs, would you conveniently cover the unexpected bills? When COVID hit in 2020, about 39% of Canadian households said the funds in their bank account were insufficient to cover a financial emergency.

Life happens to everyone and at any time. Hence, you need some emergency funds for the rainy days..

An emergency fund is money you set aside to pay for sudden, yet necessary expenses to:

Have financial control
Have peace of mind
Avoid high-cost loans (such as a payday loan or a credit card cash advance)

Setting Up an Emergency Fund

The size of your emergency fund depends on your financial situation, expenses, lifestyle, and debts. It’s advisable to have 3-6 months’ worth of expenses saved in your emergency fund.

However, if you’re currently paying off debt, your emergency fund may be smaller. This will help you cover smaller payments while you focus on paying off your high-interest debt.

Here are 5 tips to help you build an emergency fund.

1. Practice Healthy Financial Habits

Before you can stash away any money for the rainy day, you must first figure out your monthly expenses by factoring in recurrent necessities like housing, transportation, bills, and groceries, and then multiply it by 3-6 months. That is the sum you need to have ready. Also, give up one or two impulse purchases a week, and stash that money into your savings.

2. Open a savings account

Choosing the right type of account to build your emergency fund would make it easy to access your money in case of an emergency.

You may choose a savings account that is separate from your daily transaction account and which has no or low transaction fees. The account should allow you to make withdrawals without penalty and generates interest on the money you save.

Please seek advice from your financial institution to find out the different account options they offer so you can make a well-informed decision.

3. Start by saving a realistic amount

It’s better to start with a small amount like $10/week, especially if you earn daily or weekly. With time, you can bump it up to $15 or $20.

After all, saving a small amount regularly can make a big difference in reaching the desired total amount for your emergency fund. $10 a week will give you $520 after a year and $20 a week will give you $1,040 at the end of a year. Consistency is key.

Remember you can also earn some interest from banks when you save your money with them, and get some tax savings from the government too.

4. Automate your savings

Do you know you can set up your automatic transfer as soon as your pay cheque is deposited into your account? The sooner it’s saved, the better. So choose an amount and date and start building your savings.

5. Review and Increase Emergency Fund

Regularly review your financial goals based on changes in your family, personal or work situation. When changes like a new baby, house, or increase in electricity and water tariffs occur, modify your budget accordingly so that your emergency fund remains a priority.

Once you hit your targeted saving amount or finish paying off any debt, set a higher emergency fund goal and thrive to achieve it. Deposit any additional amount like a tax refund, pay raise, bonus at work, or even cash gift, into your savings account whenever possible.