How to start an emergency fund

Emergency fund. You’ve heard or read those two words countless times since the COVID-19 pandemic landed with an impact that’s been financially challenging, and even devastating, for many Canadians. You know you should have an emergency fund to dip into in case of job loss, illness, or another urgent need for money, but where to begin? Do you just start putting money away in an account and hope you’ve saved enough for the next crisis?

It takes a bit more planning than that and there is some math but it’s not complicated at all, says Melanna Giannakis, a financial services advisor and Meridian branch manager.

Start with the big picture

To figure out how much you should save, you should start with your net salary or what you bring in after you pay taxes and other deductions, says Giannakis. “Let’s use the average Canadian salary of about $55,000 and say that your after-tax income is $42,000 [rounded from $42,481]— keeping in mind, of course, that taxes are marginal, so a different tax rate would be different depending on the person.”

 This tool can help you figure out your after-tax income. 

Break it down monthly

Once you figure out your after-tax income, the next step is to divide it by 12. That will give your monthly take-home pay. “So when you divide the $42,000 by 12, that’s $3,500 a month,” says Giannakis. “That also gives you your monthly emergency fund number and what we suggest is that you put away three to six months of that net figure.” 

Get granular

Let’s say your immediate goal is to save three months worth of income into an emergency fund, and you aim to save that amount within a year. 

So it should look like this: 

Gross income = $55,000

Net or after-tax income = $42,481 for Ontario (this means an average tax rate of 22.76%

and a marginal tax rate of 29.65%)

Net income divided by 12 = $3,540 per month

Three months of emergency funds = $3,540 x3 = $10,620

Divide by 26 pay periods = $10,620 x 26 = $408.46

Take a moment to freak out over the number

Now you know how much you need to put away with each pay cheque. That number can seem overwhelming, Giannakis says. “Somebody might be thinking ‘Oh, like $400 bi-weekly, that’s a lot of money, how do I save it? Well, you’ve got to track your expenses to figure it out.”

Create or look at your budget

It’s the B-word again but it’s key when figuring out how to fund your emergency account. When creating your budget, Giannakis says to not insert numbers from memory. “People have no idea until they look back at their account how much they spent, for instance, on takeout,” she explains.  “People think they spend $100 a month on takeout then they look at their bank account and realize that they’ve spent $300 or $350 a month instead, especially now.” She suggests getting your bank statements together or if you are paperless, having your bank account accessible while you fill out your budget.

 Find worksheets to create your budget here. 

Trim the spending in your budget

Go through your budget to see where you can scale back. Takeout meals and online shopping are a good place to start. If you’re saving money on car insurance or have cancelled your gym membership, put that money towards your emergency fund. Other options, say Giannakis, is to scale back your streaming memberships by either cutting back on the number of services, going for the basic service and cancelling any unused subscriptions.

Set up a separate account

Whether you choose a non-registered high-interest savings account or decide to grow your money inside a tax-free savings account, you want to make sure your emergency fund is liquid and easily accessible. A GIC isn’t a great option, because you will likely be hit with penalties for taking money out in an urgent situation. However, you don’t want the money in your fund to be too accessible; avoid connecting it to your daily chequing account or debit card because that increases the temptation to spend the money.

Create a pre-authorized contribution

“A pre-authorized contribution, or a PAC, can really be your best friend because

it allows you to automatically set an amount of money to be taken from your account and you can align it to your pay periods,” says Giannakis. Since it’s automatic, you won’t see the money, so won’t be tempted to spend it.

If you’re self-employed

You may not have regular pay periods but you can still set up an emergency fund. Giannakis recommends taking your average income from the past two years to figure out your net income. Then you can figure out your budget and how much you should deduct on a monthly basis.

Should you save more due to the pandemic?

Prior to the pandemic, the recommendation was to save three to six months of expenses—but should you save more? If you can, “absolutely,” says Giannakis. “The first thing I will say is that we should change it from from six to 10 months, seeing how long these disasters or emergencies can go on.”

That’s a tall order for most of us, so how can we stay motivated? “You want to set attainable goals,” Giannakis says. Once you’ve saved three months, you can create a new goal and continue saving until you’ve built up enough of a fund to see you through this and future crises.

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