The goal of building an emergency fund is to have enough money to cover expenses while you’re not earning money because of life events like unexpected car or home repairs, injuries, job loss or a global pandemic.
Understanding how much you’ll need is an important first step. Start by planning for the most likely emergency, which in most cases is a gap in employment, and think about how many months it will take to find a new job.
Next, review your spending from the past month and remove any one time or non-essential purchases or any expenses you think you can defer, then multiply what’s left by the number of months you estimated above to determine how much you need as a minimum.
Decide on how much you can afford to put aside regularly and forecast how long you’ll need to save enough for the lower limit. If you feel a knot forming in your abdomen, you should try to figure out how to increase it.
TFSAs are well suited for emergency savings as there’s no tax to deplete withdrawals and budgeting is much more transparent. Withdrawals are entitled to the usual re-contribution credit, which can be both the motivation and target for replenishment once the emergency passes. Set up automatic transfers to the fund, ideally aligned with your pay cycle.
How and when you use your fund depends on how you define "emergency." Commit yourself to only using it for truly pressing needs, not emotional wants. If you need to use your Emergency Fund, make sure to watch your spending in case the loss of income lasts longer than expected. You can also leverage your line of credit if needed, though for some people taking on debt at a time of financial stress may be uncomfortable.
Contact an Advisor to learn more about how an emergency fund will help you manage an unexpected situation and start your savings plan today.