Getting Started: Emergency Fund

As a best practice, we recommend keeping a certain amount of cash-on-hand in a high interest savings account for your emergency fund. The goal is to cover between 3 and 6 months of current expenses, but sometimes more depending on your situation. An emergency fund is used to cover the truly unexpected, like a job loss, a disability, or a medical emergency for example.

Answer the questions to get a sense of your target emergency fund. Do this after completing your expenses and cash flow sections in Discovery.

Why An Emergency Fund?

Having an emergency fund means there is one less thing to worry about if the unexpected happens. We recommend at least 3-months of expenses in an emergency fund when you have fewer financial commitments and at least 6-months of expenses when you have additional financial commitments like owning a home or having a family or dependents. For anyone with precarious employment, variable income, commissioned sales, self-employed, or a rental property we recommend an additional 3-6 months of expenses on top.

Having an emergency fund provides an enormous amount of peace of mind.

An emergency fund also represents the MAXIMUM amount of cash-on-hand we would like to have. Any additional cash that is not needed in the next 3-5 years should be invested for the future.

Hybrid Option: Instead of a fully funded emergency fund, you may choose to use a hybrid strategy, with a smaller emergency fund but leaning on a line of credit for larger emergencies. This is a possibility for homeowners with a large amount of home equity. This is a slightly higher risk approach, as a line of credit can be reduced or recalled at any time, however it does free up additional cash flow that can be used to maximize your TFSA and RRSP earlier.

At the moment, there are high interest savings accounts that provide reasonable interest rates and are CDIC insured. We recommend you consider setting up your emergency fund with one of these institutions.