Because it never hurts to pack an umbrella.
What’s an emergency fund?
Like an insurance policy, an emergency fund prepares you for the plot twists you don’t see coming. You never know when you’ll encounter an unexpected expense or change in circumstance – and it’s always best to be prepared.
For example, an emergency fund can help if:
- You leave your job
- You need to find new housing quickly
- Your house or car requires a sudden repair
- You need to pay for a medical expense
If you run into an expensive surprise without savings on hand, you’ll likely have to rely on credit or pull money from your retirement fund – delaying your financial objectives. Tucking some money away “just in case” can help you feel more secure about the future and ease financial stress.
Almost anyone can (and should!) start an emergency fund. Keep reading for tips that will prepare you to weather any storm.
How do I start an emergency fund?
The first step is assessing your finances to determine:
- The amount of money you should ultimately have in your fund
- How frequently you can contribute to the fund
- How much you can contribute at that frequency
You don’t need to contribute everything in one go – it’s totally fine to chip away at your goal amount. Remember: saving just $10 or $20 a week can make a difference.
Unsure how much you can afford to contribute? Take a look at your total monthly income compared to total monthly expenses. Is there anything left over? If not, are there any expenses you can eliminate like unused subscriptions, impulse buys, loan interest etc.)?
P.S. We wrote a whole blog on organizing your finances – check it out.
How much should I save?
Experts recommend saving 3 to 6 months worth of expenses or 3 to 6 months worth of income.
Let’s say you make $4,500 a month. Three months of income would equal a goal of saving $13,500 in your emergency fund.
If you saved $200 per paycheque, it would take you roughly 2.5 years to save $13,500.
Another example: you want to save three months worth of expenses, and you have $2,000 in expenses each month. That would mean saving $6,000 in your emergency fund. If you put away $200 per paycheque, it would take just over a year to save that money.
Don’t get me wrong, $200 is a lot of money. Maybe saving up $13,500, or putting aside $200 a paycheque, just isn’t realistic – and that’s okay. Decide on an amount you know you can reach and go from there.
What account should I use for my fund?
By the way, liquidity refers to how easily accessible your money is in cash. Cash is the most liquid asset (logical), while publicly traded stocks are a little less liquid. Art and real estate are some of the least liquid assets you can own – they take a long time to sell.
That’s why it makes sense to keep your emergency fund in cash and to invest money you won’t need for a while. Want more specifics? Check out this blog we wrote on when to save and when to invest!
But how do I save?
Here are some tips and tricks to set yourself up for saving success!
- Use scheduled deposits to automatically move your money into the right account.
- The brilliance of automatic deposits is that you don’t need to think about your emergency fund – whenever you remember to check your balance, it’ll be like finding $20 in your pocket. ;)
- Avoid an “all or nothing” mentality.
- If one month you can’t put away the full $150 (or whatever amount you’ve decided on), don’t skip the contribution completely. Saving $50 will still count toward your goal!
- Stay flexible.
- Don’t be afraid to shift strategies or re-evaluate your goals. Your plan should change when your circumstances do.
- Take advantage of large payments.
- Lump-sum payments – like your tax refund – are an easy way to boost your emergency fund in one go.
- Celebrate your wins!
- Don’t forget to remind yourself that you’re doing amazing, sweetie.
What do I do after I reach my goal amount?
Can you ever have too much money in your emergency fund? Well, potentially…
After reaching a certain threshold, adding more money to a savings account may not benefit you as much as, say, investing it. Of course, this depends on your specific goals, account type, money saved, etc.
Once you reach your goal, consider whether you can redirect your contributions to a different account, since liquidity may be less important at this stage. Make your money work for you!
When do I use my fund?
What exactly constitutes an emergency? Two factors to consider are timing and necessity.
If you’re anticipating an expense – like paying tuition in the fall – it’s best to put together a plan for how you’ll pay it instead of relying on your emergency fund. This money should be reserved for those expenses you truly can’t see coming.
And as for expenses that aren’t strictly necessary…avoid paying for “wants” out of your emergency fund. If you can’t otherwise afford these purchases, you may need to cut them out or re-evaluate your budget.
Stick with it…
Your emergency fund should be there to make mountains back into molehills. Saving money may not be the most fun – but you’ll be glad to have emergency cash on hand when you need it!