Why and how to create an emergency fund

First, define emergency

Since emergencies are sudden and unexpected, it may be easier to define what they're not, rather than what they are.

Your kid’s prom, not having playoff tickets or being behind on your holiday shopping are not emergencies. True emergencies come out of nowhere and can hit you with a major expense, or interfere with your ability to earn money.

Examples include a blown transmission, the loss of a job, or a flooded basement. For those, you want to set up an in-case-of-emergency-break-glass fund in a separate account.

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Choose the right kind of account

Your emergency fund should be accessible enough that you can withdraw money on short notice, but not so accessible that you can just dip into it on a whim.

Consider opening a high-interest savings account. Compare interest rates and fees. Make sure it’s convenient for transferring or withdrawing money in a hurry.

Eliminate the need for self-discipline or willpower. If your employer pays by direct deposit, divert a portion of your earnings to the savings account. If you deposit your paycheques into a chequing account yourself, set up recurring transfers to the emergency fund.

You might choose to put your emergency money into guaranteed investment certificates (GICs), which pay higher interest. But there are pros and cons, because those are designed to be long-term investments.

Banks and credit unions typically charge penalties for cashing out GICs early. The penalties can encourage you to leave your emergency savings alone, but you'll be missing out on the flexibility of a high-interest account — and take a financial hit if and when something happens and you need to tap into your money.

Good high-interest savings account options include:

• EQ Bank: This online-only bank offers one of the best high interest rates on savings and deposits in Canada. Customers can expect to earn on every dollar deposited, but still have the freedom to pay bills using the no-fee account. For instance, save $10,000 in an EQ Bank savings account as an emergency fund and earn $400 in interest. It's easy to open the EQ Bank account using their simple 100% online process. Open an EQ Bank high interest savings account today.
• Scotiabank's Momentum Plus Savings Account: As one of the Big 5 Banks, Scotiabank is a reputable traditional bank with plenty of in-person branches. Right now, new clients can earn 6.05% on every dollar deposited for the first three months. There are no fees and no monthly minimum required on the account. Open a Scotiabank Momentum Plus Savings Account today.
• Simplii Financial High Interest Savings Account: This online-only bank never charges monthly fees and offers some of the best bank promos. Until July 31, 2024, new clients can earn 5.9% on eligible deposits for five months, before it drops to the regular 0.40% earn rate. On a $10,000 emergency fund deposit that's approximately $290 in interest income. Open a Simplii high-interest savings account today to get a versatile, no-monthly-fee account.

Find ways to beef up your fund

One surefire way to boost the amount you can save is to stop spending money. Scrutinize your bank and credit accounts to find out where it’s all going.

Consider downgrading or eliminating cable TV — we can stream it all these days. Cancel the gym membership, and work out for free at the community center. Skip the daily Starbucks, carpool to work, install a programmable thermostat, and cook at home.

Teach art, music, swimming or carpentry in your spare time. Sell excess furniture, electronics and housewares on eBay or Craigslist.

For the purchases you do make, it's a good idea to consider using a credit card that rewards you with cash back on your purchases. For example, Moka rounds your purchases up to the nearest dollar and invests the spare change on your behalf.

It's also worth considering taking advantage of programs like RBC's Nomi Find and Save, which is a free program that analyzes your cashflow and looks for pockets of money that can be automatically set aside and saved.

Unexpected vet bills don’t have to break the bank

Life with pets is unpredictable, but there are ways to prepare for the unexpected.

Fetch Insurance offers coverage for treatment of accidents, illnesses, prescriptions drugs, emergency care and more.

Plus, their optional wellness plan covers things like routine vet trips, grooming and training costs, if you want to give your pet the all-star treatment while you protect your bank account.

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Get cash back

If you rely on your credit for puchases, you can take advantage of the opportunity to get some cash back on those purchases. One great option to consider is the Tangerine Money-Back Credit Card, which pays you 2% cash back on two categories of your choice (e.g. groceries, recurring bills, gas, drug stores, etc.).

Apply for the Tangerine Money-Back credit card

You can also use an online service to score gift cards to over 100 of your favourite retailers in exchange for completing surveys and watching videos. This way, you make some extra cash with minimal effort and maybe even having a little fun while you're at it. Who says savings has to be painful?

Try Swagbucks and score gift cards

The best robo-advisors have apps that help you monitor and manage your investments on the go.

There are also many apps out there that enable you to get cash back on everyday purchases and many of them, like Rakuten, are free to download and use.

Calculate how much you need to put away

At a minimum, every household should save enough to cover expenses for three months. The target amount depends on factors such as the number of kids in the home, how much is owed on the mortgage, and each breadwinner's career prospects in the event of job loss.

Some experts recommend that you put aside enough money to get by for six months, while personal finance personality Suze Orman said you should try to save up to a year's worth of living expenses in your emergency fund.

Once you've decided how many months your emergency cushion should cover, tally up your regular expenses — including rent or house payments, a car payment, car insurance, child care, utilities and groceries.

When you've determined your monthly expenses, determine your savings goal by multiplying by the number of months you want your fund to cover. A banker, accountant or credit counselor can take a look to make sure you’re on the right track. There are also emergency fund calculators online.

Yes, you really need emergency savings

Annual household spending in Canada is $67,126 on average, according to the latest Statistics Canada research², so a six-month emergency fund for average earners should be approximately $33,563.

Five-figure savings goals can be intimidating. Just remember that saving even a small amount each month is better than saving nothing at all. Stick to your goal, whether it’s $500, $200 or even $50 per month.

Jump-start your savings by shopping around for a bank that offers an introductory bonus for new customers. And resist the urge to blow the next big tax refund you receive. Each time you get an unexpected windfall, sock it away into the savings account.

If you build a big enough buffer, you’ll never have to go into debt for unplanned expenses. You'll be able to afford your new transmission or cover for job loss, and you won’t drain your retirement fund or be forced to sell stocks at a loss.

Sources

1 Statistics Canada report (February 2023)

1 Statistics Canada report (October 2023)