Emergency fund 101: How much you need and where to keep it

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by Ratehub.ca September 16, 2020 / No Comments

This blog is sponsored by EQ Bank.

Life can be unpredictable. Everyone is experiencing this truth firsthand these days.

Whether it’s a sudden drop in income or coping with a large unexpected expense, circumstances can change in an instant. With that in mind, there’s never a wrong time to start building an emergency fund to avoid being completely blindsided by life’s unwelcome surprises.

An emergency fund is a fundamental component of personal finance and a surefire way of stabilizing your financial future. And while there’s no definite blueprint on how to build an emergency fund, there are some universal truths and approaches to saving that can make your journey to creating one more effective.

What is an emergency fund and why it’s important

An emergency fund (or rainy-day fund) is a sum of easily-accessible money that’s set aside only to be used in the case of absolute emergencies, like unexpected yet necessary bills or paying for everyday essentials in the event of a significant drop in income. An emergency fund acts as a financial safety net to help you avoid dipping into your long-term savings, retirement fund, or worse, racking up debt, just to make ends meet while navigating financially choppy waters.

Just remember: emergency funds are only for emergencies. You shouldn’t withdraw money from your fund unless it’s to pay for the unexpected, urgent, and absolutely necessary. A last-minute cottage getaway with friends or a limited-time offer on a new gadget aren’t good enough reasons to withdraw from your emergency fund.

An emergency fund should only be used in certain situations, such as:

  • Loss of employment or significant reduction in income
  • A major home repair (i.e. due to flooding or exterior house damages)
  • Sudden illness and any related medical or dental expenses, or
  • Major car repairs.

How much should you save in an emergency fund?

On the conservative end, experts recommend you save the equivalent of three-to-six-months’ salary in case of a sudden loss of income. More laissez-faire saving advocates will tell you to save enough money to cover your household expenses through the same time period, but without factoring luxuries like meals out and entertainment. The nature of the beast is, the more you place in an emergency fund, the bigger your safety net.

While the numbers vary by person, family size, and neighborhood, some estimates peg the average monthly cost of living in Toronto – not including housing –  to be $1,241 for a single person and $4,500 for a family of four. When factoring in housing, a healthy six-month emergency fund based on these guidelines could easily add up to $16,500 for a single person to upwards of $48,000 for a family of four. Obviously, these numbers are just estimates and will be lower if you live outside of a major city, you’re a thrifty spender, or happen to pay considerably less on accommodation by splitting rent with roommates or living at home with family.

We know the idea of saving six months’ worth of expenses or your salary can feel daunting, but don’t let that deter you. Start small. Even setting aside $500 or $1,000 can make a profound difference in the event of an unforeseen emergency. Bottom line, these are only guidelines, and you can make adjustments as needed. Just get started building your emergency fund right away.

Where you should keep an emergency fund

Since emergencies are often unpredictable, your emergency fund should be easily accessible at a moment’s notice. That means being able to withdraw your funds instantly with no repercussions.

Therefore, the best place to keep your emergency fund is in a high-interest savings account, like EQ Bank’s Savings Plus Account.

EQ Bank’s Savings Plus Account

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    • 1.50% everyday interest1
    • No minimum balance
    • Free Interac e-Transfers®
    • Cheap international money transfers

EQ Bank’s Savings Plus Account earns 1.50%1 interest, has no monthly fees or minimum balance requirements, offers free Interac e-Transfers®, and ensures your money is safe and guaranteed. All those features combined make it a perfect place to keep your emergency fund. You’ll earn a high-interest rate to help your fund keep up with inflation while also having the flexibility to instantly move your money around. EQ Bank’s Savings Plus Account also offers cheap international money transfers and joint account options, so you can financially support loved ones abroad and build a fund faster with your partner.

Here’s how much more in interest you could earn on a $10,000 emergency fund with EQ Bank’s Savings Plus Account versus a regular savings account from one of the big banks.

Year

EQ Bank’s Savings Plus Account (1.50%) Regular Savings Account (0.05%)

0

$10,000 $10,000

1

$10,151.04 $10,005.00

2

$10,304.35

$10,010.00

3

$10,459.98

$10,015.01

Total Interest $459.98

$15.01

With EQ Bank’s Electronic Funds Transfer feature, you can also move large sums of money (upwards of $30,000) between banks in as little as two business days from the convenience of your phone in case of extreme emergencies when the daily limit of $3,000 imposed by Interac on e-Transfers® proves too limiting. Lastly, deposits held at EQ Bank are eligible for CDIC2 coverage and backed by Canada’s ninth-largest Schedule 1 bank, which means your emergency fund is safe even in the highly unlikely and absolutely worst case scenario EQ Bank shuts down.

Where you shouldn’t keep an emergency fund

Mutual funds, stocks, and ETFs may be good options for long-term investing but not emergencies. Emergency funds need to be easily accessible and liquid, not invested in the market where values fluctuate on a day-to-day basis. The last thing you want is to be facing an emergency and your only option is to sell investments off while your portfolio is down.

Meanwhile, GICs impose more restrictions on withdrawals while chequing accounts earn no or barely any interest and make it a bit too easy to spend your emergency fund on a whim with the swipe of a debit card. TFSAs and RRSPs also have complexities around withdrawals and contribution limits. Finally, there’s leaving your money under your sofa, but that has its own drawbacks. Like the fact it won’t earn any interest and will lose value over time. Not to mention, your money could get stolen or damaged.

How to build an emergency fund

Step 1: Calculate your average monthly expenses

As we touched on above, the general rule is an emergency fund should ideally cover three-to-six months worth of living expenses. These living expenses should include critical and unavoidable expenses such as:

  • Rent or mortgage payments,
  • Car payments and gas,
  • Bills payments and utilities,
  • Groceries, and
  • Childcare.

While the monthly costs listed above are tailored towards loss of employment, a substantial emergency fund should cover other emergency expenses as well. Remember: an emergency fund is supposed to keep you afloat during times of financial hardship, meaning keep you or your loved ones financially stable.

Step 2: Open a high-interest savings account

Emergency savings is about one thing: quick access to cash. With a high-interest savings account, you can earn some interest on your emergency fund and still have unfettered access to your money whenever you need it.

You’ll also want to create a designated account just for your emergency fund to make it easier to track your progress while lessening the temptation to spend it. With EQ Bank’s intuitive online interface, you can create up to 5 separate savings accounts under the same profile and label each with a unique name – helping you separate and track your emergency fund and ensure it doesn’t get mixed up with other short-term savings goals.

EQ Bank’s Savings Plus Account

Apply Now Button-small

    • 1.50% everyday interest1
    • No minimum balance
    • Free Interac e-Transfers®
    • Cheap international money transfers

Step 3: Automate your savings

The most effective and low effort way to build your emergency savings is to do so gradually by scheduling automatic transfers from your chequing account to your savings account. By automating your savings, you’ll approach building an emergency fund as a routine payment just like any other bill.

EQ Bank’s Savings Plus Account lets you easily schedule recurring transfers on any day of the month. We recommend automating your savings each time you get your paycheque (whether that’s bi-weekly, bi-monthly, or if you’re a freelancer, whenever you close a deal). This way, you’ll guarantee some of your money is set aside for emergencies before you have a chance to spend it.

When you’re deciding on how much to set aside each paycheque, think about how much you get paid and how much money you typically have left over when the next cheque arrives. Whether it’s 10% of your paycheque or $200 every payday, find the amount that works for you. There’s no harm in adjusting how much you save to make sure you can cover your day-to-day expenses.

Step 4: Stash away bonuses and tax refunds

Did you receive a windfall of unexpected money? Whatever the reason – whether it’s a tax refund, annual bonus, or generous birthday gift – set the money aside to give your emergency fund a boost instead of spending it. You can achieve your emergency fund goals months sooner this way.

Step 5: Try and cut out frivolous spending

Building an emergency fund and automating your savings is also the perfect time to put your spending habits under the microscope. Spot areas where you can cut out frivolous purchases and maximize your spending.

Cancel gym memberships and streaming services you rarely ever use. Ditch pricey lattes and brew your own coffees at home. Use coupons and money-saving apps whenever buying groceries, and always stick to a stringent shopping list. Call your internet provider to negotiate a better rate. Adopt the “24 hour rule” whenever you’re thinking about buying something new to avoid impulse purchases. Designate select days when you can order out to avoid making food deliveries a routine. All these strategies can cut down your spending and allow you to allocate more money towards your emergency fund.

The bottom line

Saving isn’t easy, but it shouldn’t be complicated. While every person has a unique financial situation and priorities, gaining control and perspective of your finances always begins by creating a bi-weekly or monthly budget and living beneath your means.

By following the steps outlined in this article – like opening a flexible, high-interest savings account and automating your savings – you should find yourself with a solid emergency fund within a year. Remember, this is a journey and not a race!

EQ Bank’s Savings Plus Account

Apply Now Button-small

    • 1.50% everyday interest1
    • No minimum balance
    • Free Interac e-Transfers®
    • Cheap international money transfers

1 Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

2 Equitable Bank is a member of CDIC. EQ Bank is a trade name of Equitable Bank. Deposits made under EQ Bank and Equitable Bank are aggregately eligible for CDIC protection up to $100,000, per insured category, per depositor.


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