The emergency fund: what it is for, and how much is enough

In August 2023, four months after we landed, our account was down to one month's rent. I know exactly what it is like to count the weeks. That is why this is the first thing I teach, before any account, any product, anything about growth.

What it is

An emergency fund is cash, set aside, that you do not touch unless something goes wrong. Its whole purpose is to turn a crisis into an inconvenience. When the car fails or the contract ends, the fund pays, and the rest of your life keeps going.

It is not an investment. It is not supposed to grow. Its job is to be there.

How much is enough

The common guidance is three to six months of essential expenses. Essential means rent or mortgage, groceries, utilities, transport, minimum debt payments, insurance. Not the full lifestyle.

Where you land in that range depends on how stable your income is:

• One steady salary, in demand: the lower end may be reasonable.
• Two incomes: losing one is survivable, so the household can often hold slightly less.
• Self-employed, commission, contract, or a new arrival still establishing a career: the higher end, sometimes more. Uneven income needs a deeper cushion.
• Supporting family abroad: add room for the emergency that happens in another country.

count months of rent, not a round number

Where it should live

Somewhere safe and boring, where you can get it within a day or two and where its value does not move. A high-interest savings account is the usual answer. It can sit inside a TFSA if you have the room and want the small amount it earns to be untaxed, but the container is secondary. What matters is that it is separate from your day-to-day account, so it is not spent by accident, and that it is not locked in.

It should not be in anything whose value can fall in the same month you need it.

Building it when the month is tight

The instinct is to wait until there is spare money. There never is. What works:

1. Start with a first target you can reach quickly, one month of essentials, or even less. Reaching a target matters more than the size of the first one.
2. Automate a transfer the day you are paid. Move the money before it feels available. Even a small amount, monthly, builds a habit and a balance.
3. Direct windfalls to it. Tax refunds, a bonus, money from selling something.
4. Pause investing until the first target is met. This is the sequence I now teach, and the one I wish I had followed: cushion first, then growth. Investing with no cushion means selling at the worst moment when life happens.

When you use it

You will. That is what it is for. When you do, the only rule is to start refilling it the following month. A fund that has been used once and rebuilt is a family that has learned it works.