How to make an emergency savings fund

Life can be full of surprises. But not all of them are good. These unexpected events typically have financial consequences, too. Consider a job loss in a shaky economy, a costly roof repair on your home, a broken transmission in your car, or a sudden illness. Having an emergency fund for these events can be your financial buoy to help you avoid sinking into debt.

What is an emergency fund? 

An emergency savings fund is designed to have money put away for unexpected and sudden unforeseeable events. Typically, a solid target is having at least three to six months of expenses saved up for your emergency fund.

This cash buffer in a savings account can help you weather the storm ahead. Instead of relying immediately on credit cards or other loan products, you will have money ready to minimize the financial impact.

A 2022 survey by the Chartered Professional Accountants of Canada reports ­that only 54% of Canadians have emergency savings. What's more alarming is that the survey showed that 26% of Canadians couldn't come up with $500 if there was an emergency without needing to sell an item or borrow money. Additionally, 38% could not come up with $1,000 in an emergency, and 50% couldn't come up with $2,500.

Having emergency savings can be especially useful when unfortunate circumstances last longer than expected. For example, job loss due to a pandemic or illness that puts you out of commission for a while.

Rainy day savings are similar to emergency savings but typically are for smaller, one-time expenses, such as a flat tire.

Where should I put my emergency fund? 

It’s smart to store your emergency savings in a separate savings account.  It’s highly accessible and connected to your BMO Debit Card. But the money is also separated to minimize the possibility of spending the funds unless it’s a true emergency.

A savings account also earns interest. This way, your savings grow in a safe, predictable way.

If you have a BMO Savings Amplifier Account, your money is eligible for Canada Deposit Insurance Corporation (CDIC) coverage. For more details, you can visit cidc.ca.

If you’re currently without an emergency fund — or want to start one now— open a savings account and aim to have three to six months of expenses saved at a time. This may vary, depending on your lifestyle, your home ownership status, the number of dependents you have or if you have a highly irregular income.

Although building an emergency fund may take some time, it’s a worthwhile practice that can help you in the long run.

What is the 50/30/20 budget rule? 

The 50/30/20 budget rule is a guideline for what percentage of your take-home pay should be allocated toward certain categories. This rule is a great way to keep a habit of growing your emergency savings. The 50/30/20 budget rule suggests paying no more than 50% for your needs, 30% for wants, and 20% for savings. In the savings categories, debt repayment is included. If you're just getting started with budgeting and saving, here are six golden rules of saving. 

Emergency savings fund vs regular savings? 

An emergency fund is money that you’ve earmarked specifically for emergencies and is typically kept in a savings account. In addition to your emergency fund, you can have a regular savings account for other reasons — that are more fun and inspiring — such as saving to start your own business or taking a much-needed getaway to Greece. You can open different savings accounts for long and short-term use, just be clear on what the money will be for and how much you will have to save.

How to build an emergency fund: step by step

Saving up a significant amount for an emergency fund can seem out of reach at first. But breaking it into steps makes it easier. Here’s how to build an emergency savings fund.

Step 1. Assess your personal financial situation 

Start with reviewing where you’re at in your financial situation:

• Look at total monthly income after tax
• Add up total monthly expenses
• Review monthly debt payments

Taking these steps will help you understand what you need for your emergency savings. Plus, you’ll get a closer look at your budget.

After assessing where you’re at and where your money is going, you can see how much extra room you have for savings. You can also use BMO's savings calculator to see how much you save each month can add up over time.

Step 2. Determine your emergency fund goals

Once you’ve reviewed your financial situation, set an emergency fund goal. You should aim for your emergency savings to amount to at least six months' expenses. Take the amount of your monthly expenses in step one and multiply that by six.

So, let’s say your monthly expenses are $3,500.

$3,500 x 6 = $21,000

That amount can be intimidating but remember that’s your long-term goal. It may take a couple of years to get that amount depending on your income and how much you can save. And that’s okay!

In the meantime, you can also set smaller savings goals. Start with $1,000, $5,000 or $10,000. Any cash buffer you have on hand is better than having nothing set aside. As part of your savings journey, celebrate the milestones along the way to stay motivated.

Step 3. Automate your savings online

Modern technology makes it easier than ever to get started with saving. Take advantage of apps and digital banking tools. Set up automatic transfers with your bank in a few steps so you can regularly move an amount you feel comfortable with from your chequing to savings automatically.

This can help you build a consistent savings habit, without the extra effort or thinking. To help keep track of your goals and stay motivated, you can use the BMO Savings Goals feature to set goals and visually see how close you are to reaching your desired savings amount.

Step 4. Re-evaluate and adjust your emergency fund over time 

As you build your savings habit, you can re-evaluate your financial goals and adjust your emergency fund over time. For example, if you’ve paid off debt recently you may feel comfortable with a smaller emergency fund. On the other hand, if there’s been a big life change, like moving or job instability, you may want to boost your emergency savings.

As your financial situation changes — for better or worse — you want to update your emergency savings goals. Remember to celebrate your progress along the way. And if you’ve had to use your emergency fund or have had a financial setback, you can start again. Remember, it’s temporary.

Other ways to build an emergency fund 

Building an emergency fund from scratch can be tough, but it’s possible. To help boost your emergency savings:

• Increase income. This can mean taking on a side hustle, negotiating for a raise, or selling personal items you no longer use.
• Lower your debt. By paying down debt, you can reduce interest costs and monthly payments. Those funds can then be used to pad your emergency savings.
• Manage cash flow. Your financial management comes down to cash flow. Make sure the timing of when money hits your accounts and when you pay bills works for you. Ensure that you have enough income to pay for all expenses, with money left over to save.
• Use windfalls. Tax returns, birthday money, bonuses, or any unexpected windfalls of money can be used to boost your emergency fund.
• Open a high-yield savings account. You can earn more interest on your emergency savings with a high-yield savings account. These typically have a higher annual percentage yield (APY) than regular savings accounts. BMO’s Savings Amplifier Account can help you get started.

The bottom line

Building an emergency fund is something that takes time. Whether you’re starting from scratch or have just a little bit saved, consistency will help you reach your goals. Whether you can save $5 per week or $500 per week, it all adds up.

Your emergency fund is also something that's meant to be used when those unfortunate events occur, so it's a constant process of adjustment. 

But having money to handle life’s unexpected emergencies gives you one less thing to worry about. The emergencies are already stressful enough. Having money to solve the issue at hand can free up your time and energy to focus on other things, without added financial stress.