Emergency Funds: Why You Need Them and How to Build Them Up
It’s highly unlikely that any conversation I’ve had about personal finance in the last 10 year has not mentioned having an emergency fund.
Emergency funds are an essential part of personal finance, providing a safety net in case of unexpected expenses or emergencies. This fund is a sum of money set aside specifically for the purpose of covering unexpected expenses, such as a medical bill or car repair.
It is important to have an emergency fund to avoid going into debt or having to dip into other savings accounts.
Financial experts generally recommend having three to six months’ worth of living expenses saved in an fund for emergencies. This amount can vary depending on individual circumstances, such as job security, family size, and other financial obligations. This fund can be built up over time by setting aside a portion of income each month or by using windfalls, such as tax refunds or bonuses, to contribute to the fund.
I personally lean towards having 6 months if possible as the job market is funny, and a decent emergency pocket gives you the runway to find something you love.
More than anything- having a sufficient amount in your fund gives you some peace of mind that you’re covered should something happen.
It allows individuals to handle unexpected expenses without having to worry about going into debt or depleting other savings accounts. In the next sections, we will explore in more detail how to build an emergency fund, how much to save, and where to keep the funds.

Understanding Emergency Funds
An emergency fund is a critical component of personal finance that helps individuals prepare for unexpected expenses or financial emergencies. It is a cash reserve set aside for unplanned expenses such as car repairs, home repairs, medical bills, or a loss of income.
The primary purpose of an emergency fund is to provide a financial safety net that can help individuals avoid debt or financial hardship during a crisis. Without an emergency fund, individuals may be forced to rely on high-interest credit cards, loans, or other forms of debt to cover unexpected expenses.
It’s important to note that emergency funds should be easily accessible and kept in a separate account from other savings. This ensures that the funds are readily available when needed and not used for non-emergency expenses.
While it can be challenging to build an emergency fund, it’s important to start as soon as possible. Individuals can start by setting aside a small amount each month and gradually increasing the amount over time.
Why You Need an Emergency Fund
Having an emergency fund is essential for anyone who wants to be financially secure. Unexpected expenses can arise at any time, and without an emergency fund, people may be forced to rely on credit cards or high-interest loans to cover them. Here are some reasons why everyone should have an emergency fund:
- Job Loss: Losing a job can be a devastating blow to anyone’s finances. Without a steady income, it can be challenging to make ends meet. Having an emergency fund can help cover expenses until a new job is found.
- Medical Emergencies: Medical emergencies can happen at any time, and they can be expensive. Having an emergency fund can help cover medical bills and other related expenses.
- Home Repairs: Home repairs can be costly, and they can’t always wait. Having an emergency fund can help cover unexpected repairs, such as a leaky roof or a broken furnace.
- Car Troubles: Cars break down, and repairs can be expensive. Having an emergency fund can help cover the cost of repairs or even a replacement vehicle.
- Natural Disasters: Natural disasters can be devastating, both emotionally and financially. Having an emergency fund can help cover expenses related to evacuations, temporary housing, and repairs.
Having an emergency fund is crucial for anyone who wants to be financially prepared for unexpected expenses. It provides a safety net that can help cover expenses without relying on credit cards or high-interest loans.
How to Build an Emergency Fund
Building an emergency fund can seem daunting, but it is a crucial step in securing your financial future. Here are some steps to help you get started:
Budgeting
The first step in building an emergency fund is to create a budget. This will help you understand your monthly expenses and how much you can realistically save each month. To create a budget, list all of your monthly expenses, including rent/mortgage, utilities, groceries, transportation, and any other bills you have. Then, subtract your total expenses from your monthly income to see how much you have left over to save.
Saving Techniques
Once you have created a budget, it’s time to start saving. Here are some techniques that can help you build your emergency fund:
- Automatic Savings: Set up an automatic transfer from your checking account to your emergency fund each month. This ensures that you save money without even thinking about it.
- Reduce Expenses: Look for ways to reduce your monthly expenses. For example, you could cut back on eating out or cancel a subscription service you don’t use.
- Side Hustle: Consider taking on a side hustle to earn extra money. This could be anything from freelance work to selling items you no longer need.
Where to Keep Your Emergency Fund
It’s important to keep your emergency fund in a place where it is easily accessible but also earns interest. Here are some options:
- High-Yield Savings Account: A high-yield savings account offers a higher interest rate than a traditional savings account.
- Money Market Account: A money market account is similar to a savings account but typically offers a higher interest rate.
- Savings Account: While not lucrative as the other 2 options, it does ensure that have access to your funds and don’t pay fees.
Note: In Canada, the key difference between the two is that high-yield savings accounts are CDIC-insured, while money market funds are not.
By following these steps, you can start building your emergency fund and have peace of mind knowing that you are prepared for any unexpected expenses that may arise.
How Much to Save in Your Emergency Fund
As mentioned above, when it comes to emergency funds, the big question is how much to save. Most financial experts recommend having at least three to six months’ worth of living expenses saved up.
To determine how much you should save in your emergency fund, start by calculating your monthly expenses. This includes everything from your rent or mortgage payment to your utility bills and groceries. Don’t forget to include any debt payments you’re making, such as student loans or car payments.
Once you have a total for your monthly expenses, multiply that number by three or six to get your target fund balance. For example, if your monthly expenses are $3,000, you should aim to save between $9,000 and $18,000 in your fund.
Of course, everyone’s situation is different, and some people may need to save more or less than the recommended amount. If you have dependents or an unstable job situation, you may want to save more than six months’ worth of expenses.
It’s also important to remember that an emergency fund is just that – for emergencies only. It’s not a savings account for vacations or new electronics. Keep your emergency fund separate from your other savings accounts, and try not to dip into it unless you absolutely have to. By building up a solid emergency fund, you can give yourself peace of mind and financial security in case the unexpected happens.
When to Use Your Emergency Fund
Life is unpredictable, and emergencies can happen at any time. It is essential to have an emergency fund to cover unexpected expenses. But when should you use it? Here are some scenarios where using your emergency fund may be appropriate:
Job Loss
Losing a job can be a significant financial blow, especially if you don’t have another source of income. If you lose your job, you may need to dip into your emergency fund to cover your expenses until you find another job. Experts recommend having at least three to six months’ worth of essential expenses saved in your emergency fund to cover such situations.
Medical Emergencies
Medical emergencies can be costly, even with insurance. If you or a family member has a medical emergency, you may need to use your emergency fund to cover the expenses. This can include unexpected medical bills, prescription costs, or even travel expenses if you need to seek medical treatment elsewhere.
This is important to note because while Canada does have Universal Healthcare, prescription medications, dental, eyecare etc are not included and those can get expensive pretty quickly.
Home Repairs
Owning a home comes with its own set of expenses, and unexpected home repairs can be costly. If your home needs repairs that are not covered by insurance, you may need to use your emergency fund to cover the costs. This can include repairs to your roof, plumbing, or electrical systems.
Speaking from personal experience, having to replace a furnace in the middle of winter is not cheap.
Car Repairs
Car repairs can also be expensive, and unexpected repairs can be a significant financial burden. If your car needs repairs that are not covered by insurance, you may need to use your emergency fund to cover the costs. This can include repairs to your engine, transmission, or other major components.
As you can see, an emergency fund is there to help you cover unexpected expenses. It’s important to use your emergency fund wisely and only for true emergencies. By having an emergency fund, you can have peace of mind knowing that you are financially prepared for the unexpected.
Replenishing Your Emergency Fund After Use
When an emergency arises, it’s important to have an emergency fund to fall back on. However, once that fund has been used, it’s crucial to replenish it as soon as possible to be prepared for the next unexpected expense.
Some have considered temporarily pausing retirement contributions. While it’s important to save for retirement, replenishing the emergency fund should take priority. Once the emergency fund is fully replenished, retirement contributions can resume.
It’s also important to consider any extra income that can be put towards the emergency fund. This could include a bonus at work, a tax refund, or even a side hustle. Putting all or a portion of this extra income towards the emergency fund can help reach the goal faster.
In addition, consider opening a high-yield savings account to help your money grow faster. These accounts typically offer higher interest rates than traditional savings accounts, allowing the money to grow more quickly.
Overall, replenishing an emergency fund after use requires dedication and a willingness to make some sacrifices. However, having a fully funded emergency fund can provide peace of mind and financial security in case of unexpected expenses.
Common Mistakes to Avoid
When it comes to emergency funds, there are some common mistakes that people make. Here are a few things to keep in mind to avoid these mistakes:
Mistake #1: Not having an emergency fund
The biggest mistake that people make is not having one at all. It’s important to have some money set aside for unexpected expenses, such as medical bills or car repairs. Without one you may have to rely on credit cards or loans, which can lead to debt and financial stress.
Mistake #2: Not saving enough
Another mistake is not saving enough money in your fund. Experts suggest having three to six months’ worth of living expenses saved up. However, the right amount will depend on your personal circumstances, such as your income, expenses, and job security. It’s important to assess your situation and save accordingly.
Mistake #3: Using the emergency fund for non-emergencies
Some people make the mistake of dipping into their emergency fund for non-emergency expenses, such as a vacation or new gadget. This defeats the purpose of having an emergency fund and can leave you vulnerable when a real emergency arises.
Mistake #4: Not replenishing the emergency fund
If you do use your fund for an unexpected expense, it’s important to replenish it as soon as possible. Otherwise, you won’t have any money set aside for the next emergency that comes your way.
Mistake #5: Keeping the emergency fund in a low-interest account
Finally, some people make the mistake of keeping their emergency money in a low-interest account, such as a checking account. While it’s important to have easy access to your money, you should also consider putting it in a high-yield savings account or money market account. This way, your money can earn some interest while it’s sitting in the account, and you’ll still have easy access to it when you need it.
Conclusion
In summary, having an emergency money is an essential part of any sound financial plan. It provides a cushion to handle unexpected expenses without derailing long-term financial goals. Here are some key takeaways to keep in mind:
- Aim to have at least 3-6 months’ worth of living expenses saved in your fund.
- Keep your emergency money in a separate savings account that is easily accessible, but not too easily accessible that you dip into it for non-emergencies.
- Re-evaluate and adjust your fund requirements as needed based on changes in your income, expenses, and overall financial situation.
- Use your emergency money only for true emergencies, such as unexpected medical bills or job loss, and not for discretionary spending.
Remember, emergencies can happen at any time, so it’s important to be prepared. Building and maintaining this can provide peace of mind and financial security.
Frequently Asked Questions
What is the recommended amount for an emergency fund?
The recommended amount is typically three to six months’ worth of living expenses. This amount can vary depending on individual circumstances, such as job security and dependents. It is important to assess your personal situation and set a realistic goal for yourself.
Where can I find emergency financial assistance in Canada?
There are several places to find emergency financial assistance in Canada. Each province has its own safety net, so start there. Additionally, there are non-profit organizations such as the Salvation Army and local food banks. It is important to research and understand the eligibility requirements for each program before applying.
How can I qualify for emergency rent assistance in Alberta?
To qualify for emergency rent assistance in Alberta, individuals must meet certain eligibility requirements such as experiencing a financial crisis or emergency and having a low income. The program is administered by the Government of Alberta and more information can be found on their website.
What is the best account to keep my emergency funds in Canada?
The best account to keep your emergency money in Canada is typically a high-interest savings account. This type of account offers a higher interest rate than a traditional savings account, allowing your fund to grow over time. It is important to research and compare different accounts to find the best option for your needs.
How can I quickly build up my emergency fund?
There are several strategies for quickly building up your fund, such as setting a savings goal and creating a budget to prioritize savings. Additionally, individuals can consider taking on extra work or selling unused items to generate additional income. It is important to stay committed to the savings goal and make regular contributions.
What are the eligibility requirements for Ontario Works emergency assistance?
The eligibility requirements for Ontario Works emergency assistance vary depending on the specific situation. Generally, individuals must be in a financial crisis or emergency and have a low income. It is important to contact the Ontario Works office in your area to determine eligibility and apply for assistance.