Debt, Finance, Personal

Emergency Fund 102: How to Start an Emergency Fund

Our previous post examined five quick facts about emergency funds but thought it worthy of having a dedicated blog to discuss how to save up an emergency fund. The article will tell you the ‘how to do if you ever run into a situation reflecting emergency in its nature and demand on your money.

How to start an emergency fund
Photo credit: Markus Spiske

Below are proven strategies on how to start an emergency fund.

12+ Tips on How to Build an Emergency Fund

The following strategies will guide you on how to build an emergency fund, helping you prepare for unexpected expenses and create a safety net for a more secure future.

1. Assess your income & expenses

To build an emergency fund in Canada, it is essential to assess your income and expenses. 

Begin by calculating your total income, including salaries, wages, and any additional sources of income. 

Next, evaluate your monthly expenses, categorizing them into fixed (e.g., rent, utilities) and variable (e.g., groceries, entertainment). 

Analyze your spending patterns to identify areas where you can cut back and save more. 

By thoroughly assessing your income and expenses, you can create a realistic budget, allocate a portion of your income towards savings, and effectively build your emergency fund.

2. Set a savings goal

Determine the amount you want to save, aiming for three to six months’ worth of living expenses. 

Consider factors like housing costs, utilities, groceries, transportation, and any other essential expenses. 

Having a specific target in mind helps you stay focused and motivated. 

Break down your goal into manageable milestones, and track your progress along the way. 

By setting a savings goal, you can establish a clear direction for building your emergency fund and ensure you have an adequate financial cushion for unexpected situations.

3. Create a budget

Creating a budget is a crucial step in building an emergency fund in Canada. 

Start by listing your income and then categorize your expenses into essential (e.g., rent, groceries, utilities) and discretionary (e.g., dining out, entertainment). 

Set a specific amount aside each month for your emergency fund and make it a priority in your budget. 

Regularly review and adjust your budget as needed to ensure you are consistently saving towards your emergency fund goal.

4. Reduce unnecessary expenses

Take a close look at your spending habits and identify areas where you can cut back. 

Consider eliminating or reducing discretionary expenses like dining out, entertainment subscriptions, or impulse purchases. 

Look for more cost-effective alternatives or seek out free activities and resources. 

Additionally, review your essential expenses such as utilities and insurance, and explore opportunities to save by switching providers or negotiating better rates. 

By consciously reducing unnecessary expenses, you can free up more money to allocate towards your emergency fund and accelerate your savings progress.

Related Posts: 9 Ridiculous Common Bank Fees Burning Your Finances

5. Explore savings options

When building an emergency fund in Canada, it’s crucial to explore savings options. 

Look for accounts that offer competitive interest rates and easy access to your funds. 

Consider high-interest savings accounts or short-term GIC accounts, which often provide better returns on your savings. 

Research financial institutions and compare their offerings to find the most suitable option for your needs. 

Ensure the account has low fees and is protected by the Canada Deposit Insurance Corporation (CDIC) or a provincial deposit insurer, which guarantees your deposits up to a certain amount. 

By choosing the right savings option, you can maximize the growth of your emergency fund while maintaining its accessibility.

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6. Cut down your debt

High-interest debts, such as credit card balances or loans, can hinder your ability to save effectively. 

Prioritize paying off these debts, starting with those carrying the highest interest rates. 

Consider implementing a debt repayment plan and allocate a portion of your income towards clearing outstanding balances. 

By reducing your debt burden, you free up more financial resources to contribute towards your emergency fund, enabling you to save more efficiently and secure your financial future.

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7. Earn extra income

To remain focused on building your emergency fund, you need extra income. 

Explore opportunities to supplement your primary source of income through part-time jobs, freelance work, or side gigs. 

This additional income can be specifically dedicated to your emergency fund, accelerating your savings progress. 

By earning extra income, you’ll have more resources available to contribute to your emergency fund without sacrificing your standard of living.

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8. Invest (Mutual Funds/ Index Funds)

Just for definition, mutual funds are a collection of individual stocks from different geography (international, North American, Europe) industries (mining, agriculture, financial services) which is available to you to purchase a unit representing a pool of these stocks in varying percentages. Index funds are the same thing but just a selection of high-performing companies.

Back to the topic, emergency funds are saved in a mutual fund or index fund; and if you pick the suitable funds, you see the value of your funds grow gradually and extend your safety nest.

However, a note of caution is that you should consider a less volatile fund, usually a lower-risk portfolio. Not in all cases, though. Some stocks are less volatile but still bring in a decent 30% return annually.

I invite you to refer to Stock and shares: 5 Top Picks for new investors in 2022 – Financial Ox and look for funds that house these tickers.

9. Automate your savings

When I started my habit of automating savings several years ago, it was emotional to see money leave my account without my action. Still, my brain soon adjusted my earnings to be the net of direct debit savings.

The trick is to make the direct debit into savings the day your payment arrives. For example, suppose I get paid $2,500 (after taxes and all deductions) on the last day of the month. In that case, I’d set up an automated transfer of $250 to leave my account the previous day of the month into a designated savings/investment account.

With time, your mind adjusts your budget to $2,250 ($2,500 less $250).

10. Save on groceries

Yes, you have a budget for groceries, and the good part is that price hikes are not as expected as promotions and discounts. Sometimes, you go to the store, and your box of tomatoes has the 4-letter magic word every consumer wants to see – SALE.

It is a wise practice to put that savings away into your emergency pot rather than reallocate that amount of ostentatious spending like rewarding yourself with a big mac.

11. Make weekly savings budget

A line item in your budget could be your weekly savings. Let’s say your weekly budget for food is $100; if $95 can’t fix your situation, it is unlikely $100 would. So, pad your weekly budget with a $5 earmarked for savings.

Another good practice is to have a set amount of savings you want to reach from stretching your dollar in stores hunting for bargains.

12. Save your tax refunds

The tax refund is an activity to determine if your taxes deducted at source (employment) exceeds how much you really should have paid to the government considering your personal/family circumstances.

You have just received a windfall of money as a tax refund; SAVE IT. It is not free cash flow to purchase a TV set, the latest iPhone, or a PS5. Just put the tax refund aside as part of an emergency fund and act like the money never came in.

13. Contribute to retirement savings plan

Many employers allow you to enroll in automatic payroll deduction into a retirement savings plan. Please take advantage of this as it reduces your taxable income and contributes to savings on your gross income before it is taxed.

Mind you, when withdrawing such, there’d be a withholding tax in the interim and a balancing number when you file your taxes.

The salient point to note is that some banks can issue you a time-limited loan against the RSP with little to no interest and no tax liability as the RSP isn’t touched.

For related articles on Emergency Funds, visit

Acredible read – The Government of Canada has written a beautiful piece on Emergency funds.

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About John Adebisi

John Adebisi is a CPA, FCCA and MBA holder with a Bachelor's degree in Accounting & Finance. He has over a decade of experience in writing personal and business finance content for audiences across North America, Europe, the UK and Africa. In addition to his writing experience, he also has a strong background in financial research and analysis, giving him a unique perspective of the financial markets. John derives pleasure in helping people make smart financial decisions, and he believes that knowledge and experience can be valuable resources for anyone who wants to learn how to manage their money.

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