Imagine your car breaks down, your roof leaks or your fridge dies. Do you have enough cash available to pay for these unexpected expenses? Or would you have to use a credit card or other loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition to handle emergencies?
A general rule for emergency savings is to have enough to pay today’s bills plus living expenses for 3 to 6 months. But there are other things to consider. What’s right for you depends on whether you’re single or raising a family, how much you earn and what sources you can tap into if you need money fast.
Being able to handle unexpected expenses – without taking on debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition – is one of the biggest benefits of saving.
5 questions to ask
1. Is your job secure?
If you lose your job, you may need emergency funds to pay your bills. Will you get any money if you’re laid off? Will you qualify for Employment Insurance (EI)Employment insurance (EI) A government plan that helps unemployed Canadians while they look for work or upgrade their skills. EI may also help Canadians who are sick, pregnant or caring for a newborn or adopted child, as well as those who must care for a family member who is seriously ill.+ read full definition? If you’re self-employed, you may need more emergency funds because you may not be able to apply for EI.
2. How likely are emergencies or sudden bills?
If you just bought a new car, you’ll have regular maintenance bills to keep any warranty valid, but you are less likely to have major repairs. If you’re driving a rusty 12-year-old car, you could have surprise repairs at any time.
3. How many people depend on you?
Do you have children? Do you have elderly parents who need financial help? If yes, you may need more cash on hand for emergencies.
4. Do you have insurance?
Do you have home insurance to cover damages? Do you have disability insurance and life insurance to provide income if something happens to you? Are any of your debts covered by insurance if you lose your job? If you have these types of insurance, you might choose to set aside less for emergencies.
5. Can you borrow money in an emergency?
Do you have any lines of credit you could use? Could you get a loan from friends, family or your bank? Try to avoid paying for big bills like a new car with your credit card. You could be paying a significant amount of interest over many years.
Where to keep emergency savings
If an unexpected expense comes up, you will need to access your money quickly. You may want to consider investments called “cash equivalents.” These products are a lot like cash, but you’ll earn interest on your money. They have low risk and give you easy access to your money. You can usually get your money out within 90 days or less.
Cash equivalents include:
- chequing accounts
- savings accounts
- money marketMoney market Low-risk investments that mature in less than three years and are very easy to turn into cash. This includes short-term GICs, bonds, and treasury bills.+ read full definition funds
There’s little risk of losing money with cash equivalents, and you often know how much you’ll make. But they also have a lower return than other short-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition investments, and they may not keep pace with inflationInflation A rise in the cost of goods and services over a set period of time. This means a dollar can buy fewer goods over time. In most cases, inflation is measured by the Consumer Price Index.+ read full definition. Before you buy, find out when you can get your money out and if there are any fees or penalties for early withdrawals.
Learn more about short-term investments.
There’s no magic number for how much money you should set aside for an emergency fund. Taking a good look at your situation will help you decide how much you should save.
Use this calculator to see how even small amounts of money saved add up over time.