Conventional personal finance advice recommends maintaining an emergency fund covering three to six months of essential living expenses. Personally, I think Canadians should consider aiming for a full year, particularly given today’s cost of living and employment uncertainty. But what if you’re starting from zero?
Without any emergency savings, even a relatively minor unexpected expense can become a financial problem. A $1,000 vehicle repair or emergency dental bill might force you to carry a balance on a high-interest credit card or, worse, turn to a payday loan. Interest charges then make it harder to save, potentially creating a cycle of borrowing that’s difficult to escape.
That’s why I think it’s important to start building an emergency fund sooner rather than later, even if you can only afford a small contribution. You don’t need a tax refund, inheritance, or unexpected windfall to get started. The important part is establishing the habit, contributing consistently, and keeping the money somewhere appropriate. Here’s how I’d approach it.
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Choose the right account
The first decision is where to keep your emergency savings. I wouldn’t recommend leaving the money in an ordinary chequing account. Many traditional bank accounts pay little or no interest, meaning inflation gradually erodes the purchasing power of your savings. Some also charge monthly fees unless you maintain a specified minimum balance.
On the other hand, I wouldn’t invest an emergency fund in exchange-traded funds (ETFs), either. The stock market can decline sharply without warning, and you don’t want to be forced to sell investments at a loss because your car breaks down or you unexpectedly lose your job. Instead, I’d look for a middle ground: a high-interest savings account (HISA).
A good HISA allows you to withdraw money when needed, protects your principal from market fluctuations, and pays a competitive interest rate. Eligible deposits at institutions covered by the Canada Deposit Insurance Corporation (CDIC) are generally insured up to $100,000 per depositor, per insurance category, at each member institution.
For example, fintech platform Wealthsimple offers a savings account with interest rates reaching 2.5%, depending on account eligibility and applicable benefits. Wealthsimple isn’t itself a CDIC member institution, but eligible cash deposits are held through arrangements with CDIC member institutions, subject to the applicable coverage rules.
Automate $25 every week
Once you’ve opened the account, the next step is making contributions automatic. If you’re paid biweekly, a good idea could be setting up a recurring transfer of $50 from your chequing account into your emergency savings immediately after every payday.
That’s equivalent to saving $25 weekly, or approximately $1,300 annually. The amount might seem modest, but consistency matters more than making occasional large contributions.
Assuming you contribute $50 every two weeks and earn a constant 2.5% annual interest rate, you’d accumulate approximately $4,050 after three years and around $6,920 after five years, before any taxes on interest.
Of course, savings rates will fluctuate, and those projections assume you don’t make withdrawals. But I particularly like automating contributions because it removes the temptation to make saving an optional decision.
If you wait until the end of the month to see what’s left over, there’s always a reason to spend the money elsewhere. Maybe everything is going well financially, so you decide to treat yourself. Or perhaps you convince yourself that you’ll contribute twice as much next month.
By automating the transfer, emergency savings become another regular financial obligation, alongside your rent or mortgage, utility bills, taxes, and retirement contributions. I think of it as paying your future self first.
And as your income increases or other debts are paid off, you can gradually increase the automatic contribution. Starting with $25 weekly doesn’t mean you need to stay at that amount forever.
