Your quick guide to setting up an emergency fund

Life is often filled with surprises, some more pleasant than others. When it comes to unforeseen events like job loss, illness or sudden home repairs, it’s important to have a financial safety net.

Having access to a ready reserve of cash can contribute to your peace of mind and prevent you from taking on additional credit card debt or loans.

An emergency fund is money you stash in a separate account to cover surprise costs. It's meant to help you manage unplanned expenses, from car repairs to replacing your furnace when it breaks down in the middle of a harsh Canadian winter.

The purpose of an emergency fund is to provide a level of insurance that you can handle an unexpected cost or a few months of expenses if you need to, without taking on a ton of new debt or dipping into your retirement savings. 

Your emergency fund is not the same as a Forget You fund. While both are important, they serve different purposes. Your emergency fund is there to protect you from unexpected catastrophes. A Forget You fund gives you the financial freedom to make a big change in your life, like walking away from a career or a relationship that's no longer serving you.

Now that you know what an emergency fund is (and isn't), let's look at four steps to start your emergency fund. 

When starting an emergency fund, you might wonder how much you need to save. Is $5,000 enough? Is $20,000 too much? What's the magic number?

The right amount depends on your situation, which isn't the same for everyone. Many experts recommend saving three to six months' worth of living expenses.³ To figure out the right amount for you, look through your bills, credit card and bank statements to determine how much you spend per month on non-discretionary expenses.

Examples of non-discretionary items include:

• Rent/mortgage payments
• Utilities
• Home maintenance
• Property taxes
• Insurance
• Vehicle payment
• Gas
• Food
• Child care
• Debt payments

Once you have an idea of your monthly living expenses, multiply the number by three to six months to get an estimate of how much you should aim to save in your emergency fund.

For instance, if you need $4,000 per month, on average, to cover your non-discretionary living expenses, you'll want to have $12,000 to $24,000 in your emergency fund.

$4,000 x 3 = $12,000

$4,000 x 6 = $24,000 

To determine how much you can afford to save, start by calculating your total monthly income. Then deduct all non-discretionary expenses, including items like rent or mortgage, utilities, transportation costs, groceries, childcare, etc.

If you have money left over after accounting for your non-discretionary expenses, determine how much you can direct to an emergency fund each month and to other discretionary costs (like entertainment, travel, etc.). Don’t forget to use unexpected windfalls, like tax refunds or bonuses, to help speed up the funding process.

The main goal is to start contributing and to be consistent. Even if you start with $25 a month and build up over time. Having something available for an emergency is better than nothing. To determine where you're spending your money and if you have cash available to put into your emergency fund, you can use Scotiabank's Money Finder Calculator. 

Building an emergency fund is typically considered a short-term financial goal requiring less than three years to achieve, and as such, a savings account is typically recommended. A savings account is a great option to park and grow your money while you work towards your goal. Ideally, you want an account separate from the one you use for day-to-day purchases and provides quick access to your money, should you need it.

There are a variety of savings accounts you can use, like a high-interest savings account (HISA). The one that's right for you will depend on your specific needs, time horizon and savings goals. Speak with your Scotiabank advisor to decide which savings account best meets your needs.

Pre-authorized contributions (PACs) are a convenient and flexible way to automate your emergency savings. You can set up recurring transfers from your chequing to a savings account to ensure your contributions are consistent and gradually build over time.

You choose the amount you want to contribute and how often – for example, weekly, biweekly or monthly. And you can adjust the amount and frequency at any point in time.

If money is tight for automatic transfers, try diverting whatever you can to your emergency fund and then increasing the amount when possible. The key is to get started.

To see how quickly your savings can grow, visit scotiabank.com/PAC and try out our interactive PAC video.

If you're living paycheque to paycheque, starting an emergency fund might seem out of reach, but there are strategies you can use to get going.