When life throws an unexpected curveball, it’s typically the financial side that causes the most grief. Now, it’s very normal to experience stress during a job loss, or when making large one-time payments like a vehicle repair or home repair – especially if there’s no established plan. And this is why what we’re talking about today, building or how to build an emergency fund, is probably one of the most reasonable things we can do to even out the learning curve of our finances in 2025.
This guide will take you through what is an emergency fund, how much to aim for, where to keep the fund in Canada, and how to build a fund empathizing that you can’t achieve your primary priorities, e.g. saving for retirement or other goals. It includes Canadian examples (from taking public transportation to ditching an expense line in your current budget) plus more on account options, tax implications, and what to do if you do access the emergency fund.
Knowing What an Emergency Fund is
An emergency fund is cash earmarked for only real emergencies (not impulse purchases or luxurious updated lifestyles). It’s a separate savings account (or other account set aside for your unplanned expenses, ad hoc expenses) so you don’t have to borrow, or lose value from unwanted investment sales.
Your emergency fund is your financial safety net or parachute to give you time and choices. When you’re in a temporary state of disarray due to a financial crisis (like sudden job loss), or urgent unanticipated expenses, the right emergency fund can help you get back on your feet while paying the unexpected payments – and provide cash flow while you plan your next move. The key features you want are accessibility, low risk, and insulation from lifestyle creep. Read Government of Canada’s tips on emergency savings for more insight into what accounts as an emergency and how much to save.
Determining your emergency fund goal
Before you save, you have to identify your emergency fund goal; the magic number that will realistically buffer your household.
Start by adding up all of your necessary monthly expenses: rent/mortgage, utilities (hydro, water, gas), groceries, insurance, transportation, minimum payments on debts, and your basic phone/internet. These are the living costs you would have to actually fund if income suddenly stopped.
Many people refer to the 3-6 months standard, but of course there is variability depending on your job security, number of dependents, and availability of other supports. Think in terms of months of expenses. If your necessary expenses are $3500/month, then your emergency fund goal would be $10500-$21000.
What to incorporate into the number
- Income volatility: if you are self employed or freelance, then you might want to increase the number.
- Debt load: If your monthly debt payments are substantial, then your target will be higher.
- Availability of help: Family or friends who may assist you temporarily would lessen your cushion amount.
- Local cost pressures: Cities in Canada, particularly Vancouver, and Toronto with expensive housing and transportation can apply additional pressures to your savings goal.
To help provide exact budgeting, the Bank of Canada’s budgeting calculator may be helpful for estimating living cost adjustments and inflation.
Deciding on the Right Account for Your Emergency Savings
You want the easy access of an online savings account but also want to earn some interest on this cash.
Get going with a high interest savings account or dedicated savings account at a bank in Canada or at an online bank. A high interest savings account typically gives you instant access, no risk, and some interest versus a standard checking account.
Ways to Compare Safe Options
- High Interest Saving Account (HISA): Reasonable interest, instant transfers, possibly CDIC insured.
- Money Market Funds: Safe option you can get through some banks with slightly higher returns than a regular HISA.
- Tax-Free Saving Account (TFSA): For tax-free growth on interest; put emergency cash in low-risk investments in your TFSA so you don’t lose money by becoming too volatile.
- Mutual Funds: Don’t use a volatile mutual fund for your emergency fund – You could lose money if the markets dip and you need cash.
If you want to create some friction so you don’t spend it, keep the fund in account at a different bank compared to your everyday checking account or from an account that is slightly slower to withdraw from while still easily access it when needed.
For more details on savings products with insurance visit the Canada Deposit Insurance Corporation (CDIC) website.
Building Your Emergency Fund Without Too Much Strain
Building an emergency fund does not mean you have to give up everything else. The aim is to find ways to save sustainably while you pay bills or saving for other goals, such as retirement savings.
Get rid of useless expenses
Start with an audit of your current budget and spot things that you spend money on, but never use or wouldn’t miss if you didn’t do them. Switch a few rideshare trips to public transportation, cancel subscriptions that you are inactive with, or lay off the restaurants and cook more at home. Even small changes add up, the key is just to start saving and ensure the momentum keeps going.
Automate and Take Advantage of Windfalls
- Set up automatic transfers or recurring transfers to your emergency savings from your checking account (an automatic transfer on payday is best practice). Treat it like a monthly bill payment.
- Use tax refunds, bonuses, or income from a side job to accelerate your progress.
- Temporarily allocate more to your emergency fund if you’re ahead on retirement savings.
- Save while paying debt — build a small $1,000 buffer before ramping up contributions.
When you use your Emergency Fund
Emergency funds are reserved for emergencies — significant home repair, emergency car repairs, hospitals bills, or living expenses after job loss. They are not for planned purchases, trips, or lifestyle changes.
If you withdraw from the emergency fund, you should restore it through increased auto contributions. Avoid turning one-time withdrawals into a habit.
Rebuild After Withdrawal
- Increase contributions temporarily until your fund is back at a comfortable level.
- Keep your emergency fund at a separate institution to avoid temptation.
Common Mistakes To Avoid
- Mixing emergency savings with other liquid cash, leading to unintentional spending.
- Chasing the highest rate of return instead of prioritizing safety and access.
- Forgetting inflation will erode savings — reassess annually.
- Storing money somewhere with slow access times, forcing you back into debt.
Managing and Growing your Emergency Fund
Your emergency fund should be a living goal. Re-evaluate yearly to ensure your interest rate is still competitive. If income rises or debt decreases, allocate the surplus to your emergency savings.
If you surpass your cushion, split excess toward other goals — retirement savings, investing, or your TFSA — balancing growth and liquidity.
Frequently Asked Questions
How quickly should I be working towards my emergency fund?
Start now. Use automated transfers and first aim to save a $1,000 starter fund before working towards your full goal.
Can I hold my emergency fund in a TFSA if I want tax-free growth?
Yes—if you haven’t maxed out. Keep holdings low-risk.
Should I pay off debt or save?
Do both. Build a small buffer while paying down high-interest debt, then ramp up savings.
What if I have inconsistent income?
Build a bigger cushion — around six months or more.
Where can I keep the fund for easy access?
A high-interest savings account, separate savings account, or money market fund.
Closing thoughts & further thoughts
Realizing how to create an emergency fund is really about providing you the flexibility so life moments happen without having to change the course of your long-term plans. Whether you are saving cash for minor car repairs or large expenses like roof repairs, the steps are always the same: set a savings deadline from your goal amount, automate your contribution, keep your capital safe from market risk, and adjust your plans as your financial situation changes.
Get started now. Even if your deposits are small weekly amounts. Automate, remove the pain of manual transfers, get those dollars as far from temptation as possible by keeping it in a separate account at a different bank, and review your plan each year. Not only will you be saving money, but you will find that priceless peace of mind that true financial security brings to you.
