Emergency Fund 101: How Much Do Canadians Really Need?

If you need an emergency fund but have no idea where to start, we’ve got you. Along with an easy shortcut to making the amount you need.

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Canadian investors are often told that they need an emergency fund. After all, with the market in such turmoil, full-time employment down, and inflation and interest rates up, anything could happen. And investors should therefore be prepared.

However, many of us might be thinking that we really need that cash! Like, right now! Alas, all these changes in the last few years have made it difficult to save. So how much exactly should Canadians consider saving for an emergency? And are there any short cuts to reaching that amount?

Just save

First off, the answer is yes. You certainly do need to save for an emergency. It’s true that you could suddenly lose a job, or a child could end up in the hospital with a broken arm (just went through this myself), and you’ll need the extra cash. Maybe not for hospital bills, but to stay afloat until everything is back to normal.

So in this case, first and foremost just put what you can aside. Anything. If it’s $10,000 amazing. If it’s $1,000, also amazing. Because it’s something. And something is far better than nothing.

From there, you can then assign what you can afford each month towards your emergency fund. And again, make it as high or low as you can manage. Even if that means only an additional $50 each month, again it’s better than nothing at all.

When is it enough?

Now if you’re able to continue saving month after month, and put aside a large chunk for instance, eventually you’ll have enough saved for an emergency. Then you can start dedicating your savings towards something else like retirement or renovations.

But how much is enough? That’s going to depend on your own budget and needs. Someone renting out a small apartment in a small town is going to need to save far less than a person living in a townhouse in Toronto, for example.

The easiest way to come up with an emergency fund then is to budget. Go through your budget and include everything, from bill payments to debts, and of course groceries and gas. You’ll want to stay as close as you can to the normal amount you would need.

Then, it’s recommended to save between three and six months of your monthly budget for an emergency fund. Again, this can be daunting. Which is why saving and investing regularly can be an easy shortcut.

Where to invest

Of course the thing is, these savings are for an emergency. And that will mean you need to invest in something that will grow slowly and steadily. This isn’t a risky investment that you’re trying to play around with. This needs to be for a real life emergency.

In that case, consider investing in an easy, low-cost index fund. A great recommendation would be the iShares Core S&P/TSX Capped Composite ETF (TSX:XIC). This fund replicates the performance of the TSX Capped Composite, which includes a wide range of Canadian stocks. This ETF provides investors with diversification across many sectors, while keeping costs down.

It’s a great option for investors seeking out a conservative investment, while also giving you exposure to  the Canadian equity market. In the last 20 years, shares have increased by 169%! Providing you with the opportunity to almost double your investment every decade. And with a 2.78% dividend yield as well, investors could have a strong emergency fund in no time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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