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Saving rainy day funds for emergencies like car and home repairs or healthcare can help you stay out of debt and have peace of mind. An emergency fund can help you by creating your own safety net to fall on when the unexpected happens.
But how much should be in an emergency fund in Canada? The 2019 Canadian Financial Capability survey reports that just over two thirds of Canadians have an emergency fund sufficient to cover 3 months’ worth of expenses. Read our guide below to learn where to keep an emergency fund in Canada and the best savings accounts to hold an emergency fund to help your savings grow so you’re ready for the day you might need them.
An emergency fund is a financial safety net you can rely on if a major unexpected event happens in your life. When not being used, it can also help you earn interest and reach your financial goals. Unlike rainy day funds that are meant for smaller, one-off expenses, an emergency fund is there to help in significant times of crisis. People commonly use emergency funds for:
Min. Age | 18 |
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Account Fee | $0 |
Transaction Fee | $5.00 |
Interac e-Transfer Fee | $0 |
Min. Age | 18 |
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Account Fee | $0 |
Transaction Fee | $0 |
Interac e-Transfer Fee | $0 |
NSF Fee | $0 |
Min. Age | 16 |
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Account Fee | $0 |
Transaction Fee | $0 |
Interac e-Transfer Fee | N/A |
Emergency funds should be used for major emergencies and not for expenses you forgot to plan for like birthday gifts, property taxes, etc. If you can answer “yes” to these two questions, it’s most likely an emergency.
Here’s a step-by-step guide on how to start an emergency fund, or rainy day fund.
A general rule of thumb is to save between 3 to 6 month’s worth of expenses, while some experts suggest saving for up to 1 year. However, how much you can contribute depends on your income, expenses and financial goals among other factors.
You can start a small emergency fund with as little a few hundred dollars, which may come in handy for things like unexpected car repairs, pet emergencies or other essentials.
There’s no one-size-fits-all when it comes to calculating your emergency fund. Here are three possible methods to determine how much you need to tuck away for a rainy day.
Here’s how much you might put away using the monthly method after breaking down your monthly expenses:
Category | Expenses |
---|---|
Rent | $1,000 |
Groceries | $450 |
Dining out | $350 |
Car loan | $200 |
Utilities | $150 |
Miscellaneous expenses | $150 |
Car insurance | $100 |
Cell phone bill | $75 |
Car fuel | $50 |
Subscriptions | $30 |
Total expenses | $2,555 |
If your goal is to have three months’ worth of expenses stored away, you’d need $7,620 ($2,540 x 3) in your emergency fund. For a more conservative savings plan of six months, you’d need $15,240 ($2,540 x 6).
If money is tight, it might be hard to find some extra cash to support your emergency fund. Instead, focus on what you can save, rather than what you should save. Here are a 4 tips to try to expedite your savings goals:
Having an emergency fund comes with a host of benefits, but there are also a few caveats to keep in mind.
Consider these factors when you’re comparing savings accounts for your emergency fund:
Savings accounts are the most common place to park an emergency fund, but there are alternatives. If you’re looking for a nontraditional place to store your money or want to build an additional reserve beyond a standard emergency fund, consider these other options:
Cashable GICs are an effective way to save for retirement but they can also be used as an emergency fund or safety net if you sign-up for a cashable GIC. Cashable GICs will let you take out your money anytime without a penalty.
Life insurance is a financial product that’s good to have, but never fun to think about. A cash value policy can protect your family if you die, but you can borrow from the policy if you need access to cash. You’re not required to pay back these loans, but they affect the balance your beneficiaries receive when you die.
Tax-free savings acccounts allow you to deposit up to $6,000 per year without paying capital gains taxes on anything you’ve earned, and far more if you haven’t yet opened a TFSA. This contribution room accumulates every year just like a Registered Retirement Savings Plan (RRSP), meaning that any unused room is carried over to subsequent years.
Finding a savings account that offers a high interest rate and low or no fees can help you grow your emergency fund quicker. Consider any of these savings accounts or compare your options to find another account that suits your needs.
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This Wealthsimple savings account is perfect for an emergency fund or a short-term savings goal.
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The CIBC US$ Personal Account is optimal for individuals who regularly manage US dollars or travel to the US often.
The CIBC Premium Growth Account is a simple savings account that can be used for a variety of purposes and by a broad range of people.
The eAdvantage Savings Account is optimal for existing CIBC clients who have access to a CIBC chequing account.