How to Build an Emergency Fund in the Middle of an Emergency

We’ve all experienced unexpected financial emergencies—a fender bender, an unexpected medical bill, a broken appliance, a loss of income, or even a damaged cell phone. Large or small, these unplanned expenses often feel like they hit at the worst times.

Setting up a dedicated savings or emergency fund is one essential way to protect yourself, and it’s one of the first steps you can take to start saving. By putting money aside—even a small amount—for these unplanned expenses, you’re able to recover quicker and get back on track towards reaching your larger savings goals.

What’s an emergency fund?

An emergency fund, or rainy day fund,  can be your financial backstop and cushion. It’s a stash of cash that you have saved up in the event that you need a few—or few hundred—bucks in a pinch.

A typical emergency fund has two key characteristics:

• It contains between three and six months of expenses.
• It’s liquid, meaning that it’s easily accessible (in a savings account, for example).

Again, the idea is that you have some easily-accessible cash that you can tap into when needed. It’s not a vacation fund or money that you can use to buy a car. It’s there in the event of a financial emergency.

How Much Money Should Be In My Emergency Fund?

Estimating how much to save in your emergency fund can be tricky. A good rule of thumb, though, is to save from 3 to 6 months’ worth of daily living expenses in your emergency fund.

What counts as living expenses? You’d need to include enough money to cover your mortgage or rent, food, insurance, utilities, credit card payments, car payments and any other bill you pay each month and wouldn’t drop to reduce your expenses during, say, a job loss.

If you calculate that your daily living expenses come out to $3,000 per month, you’d need $9,000 to cover three months of these expenses and $18,000 to cover six.

Automate your savings

Look at your monthly expenditures to know how much you can you afford to put aside each month. From there, calculate how long it will take you to build your emergency fund with your monthly savings amount.

You can set up an automatic transfer to your emergency fund from the account that your wage is paid into. Or ask your payroll department if they can pay a small part of your wage directly into the emergency fund account.

You can then set and forget, knowing your emergency fund is growing.

How can I save more?

There are a couple of ways to boost savings—even on a tight budget.

Think of your emergency savings fund as a bill. With rent or mortgage payments, contributing to a retirement fund, and myriad living expenses, you already have a lot to balance. But if you turn saving for an emergency fund into a monthly priority, you’ll get in the habit of contributing to it regularly.

Trim spending. As we shelter in place, some expenses may have temporarily gone away, like commuting costs, clothing, travel, entertainment, and eating out. Directing some of those savings to an emergency fund could help bolster your emergency fund quickly.

Emergency savings should be separate from your other savings accounts

It’s important to distinguish between emergency savings, retirement savings and other savings goals. Your emergency savings account should be a separate account that you contribute to regularly, and while accessible, isn’t touched for anything except emergencies.

Without emergency savings, you may need to turn to your RRSPs or to borrowing accounts to fund any emergency expenses, which can impact your ability to meet longer-term financial goals. You don’t want to be in a position where you need to cash out some of your RRSPs or take on debt because of an unexpected expense.

Even if you have built up emergency savings, it’s important to remember that emergencies aren’t once-in-a-lifetime occurrences. Once you’ve used your emergency savings fund, it’s important to build it back up so that you are prepared for the next unexpected event.

The bottom line

Start cutting back, pinching pennies, and prioritizing your eight-month emergency fund. Reevaluate your spending and see if you can contribute even more. Each time you successfully save another month’s worth of living expenses, congratulate yourself, and recommit to the next goal. You will start to feel more financially secure as you see your emergency fund grow. While it will take time to build up a full emergency fund, each step that you take brings you closer to success and provides you with a larger financial safety net than you had before.