An emergency fund, sized and placed
How much to keep, where to keep it, and why it comes before almost every other money goal.
An emergency fund is the least exciting account you will own and the one that makes everything else possible. Without it, a car repair becomes credit card debt. With it, a car repair is a bad week.
How much: the FCAC guideline
The Financial Consumer Agency of Canada suggests saving the equivalent of three to six months of your regular expenses, or three to six months of income if that is easier to work out. Expenses are the more precise measure, because they are what you would actually need to cover.
| Monthly essentials | 3 months | 6 months |
|---|---|---|
| $2,400 | $7,200 | $14,400 |
| $3,200 | $9,600 | $19,200 |
| $4,500 | $13,500 | $27,000 |
Count rent or mortgage, utilities, groceries, insurance, transport, minimum debt payments and anything else you can't pause. Leave out discretionary spending, which you would cut in a real emergency. Lean toward six months if your income is irregular, you are self-employed, you are the only earner, or your industry is cyclical.
What counts as an emergency
The FCAC draws a useful line. Emergencies are major, sudden and unplanned: job loss, a health problem that stops you working, an urgent car or home repair, an unexpected vet bill. Occasional expenses, such as winter tires, school supplies or the holidays, are predictable and belong in your budget, not your emergency fund. Mixing the two is how emergency funds quietly disappear.
Where to keep it
The FCAC's checklist for an emergency account: separate from your day-to-day account, low or no fees, no penalty for withdrawals, and earning interest. In practice, the usual choices are:
- A high-interest savings account at a different institution or in a separate account, so it is out of sight but reachable within a day or two.
- A savings account inside a TFSA, so the interest is tax-free. Withdrawals are available any time, and the room comes back on January 1 of the following year; see TFSA contribution room.
- Cashable GICs for a portion of a larger fund, if you can accept the terms for early redemption.
Avoid investments that can fall in value, such as stocks or equity funds. The purpose of this money is to be there, at full value, on the worst day.
Is it protected?
CDIC deposit insurance covers eligible deposits, such as savings accounts, chequing accounts and GICs, up to $100,000 per depositor, per insured category, at each CDIC member institution. Deposits held in a TFSA are their own category. Stocks, bonds, mutual funds, ETFs and crypto assets are not covered. Check that your institution is a CDIC member, or covered by your provincial deposit insurer for a credit union.
How to build it without strain
The FCAC's advice is to start with an amount small enough to keep. Its own figures: $20 a week becomes $1,040 in a year, before interest. Then:
- Automate a transfer on payday, so saving happens before spending.
- Send windfalls there first: a tax refund, a bonus, the proceeds of a sale.
- When a loan is paid off, redirect that monthly payment into the fund.
After you use it
Using the fund is the fund working. Rebuild it the same way you built it, and review the target once a year or when your life changes: a new child, a move, a new job.
- Add up a month of essential expenses.
- Set a target of three to six months of that amount.
- Open a separate, fee-free, interest-earning account.
- Automate a payday transfer, however small.
Noted.
Sources
Figures in this note were checked against these sources on the date shown above.
This note is general education, not personal financial, tax or legal advice. Rules and figures change; confirm with the source and, where needed, a qualified professional. Terms are defined in the glossary.
