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How to build your emergency fund
April 07, 2025
By Farhana Uddin
You might not be able to predict a financial emergency, but you can prepare for one. Here’s how you can be ready for life’s surprises.
It’s an uncertain world.
There’s no way of predicting the unexpected expenses that life can toss your way. Even if you’re careful with your money. From a major home repair to a medical emergency to sudden job loss, everyone runs into a financial emergency. But not everyone is prepared for it.
An emergency fund can help provide a buffer against unexpected expenses and life's curveballs. If you’re feeling worried you don’t have a financial contingency plan in place, now is a good time to create one for peace of mind. Here’s what you can do to build an emergency fund and a few important things to keep in mind as you grow your fund:
How much money should you have in an emergency fund?
As a general rule, you should have enough in your emergency fund to cover up to six months of living expenses. For many people, that means stashing away $30,000 or more. But aiming for a large, lump-sum savings goal like that can be discouraging. Instead, try building your savings in small steps.
Take a realistic look at your income and spending and figure out how much you can afford to set aside right now. Maybe you can only put away $20 or even $5 a week. That’s a good start. Simply choose a set amount per week or month that you’re comfortable with and have it automatically transferred from your chequing account. Or have it taken right off your paycheque if your employer offers a workplace savings plan. Review the arrangement regularly, and increase the amount you’re saving, if you can.
- For a clear picture of what goes in and what comes out of your bank account, try our budget calculator.
Where do you keep your emergency fund?
It’s best to keep your emergency fund away from your retirement savings.
As an example, let’s say your furnace quits in the middle of a cold snap, or your SUV blows a gasket on a road trip. If you’ve already built up a healthy sum in your retirement savings, you might be tempted to raid those savings. But here’s why you shouldn’t: it might cost you more in the long run.
For starters, all withdrawals from registered retirement savings plans (RRSPs) are subject to income tax and will result in the permanent loss of contribution room. Once you’ve taken it out, you can’t put it back in. (Except for education and home purchases, under the Lifelong Learning Plan and Home Buyers’ Plan, respectively).
Any withdrawals from your RRSP are immediately subject to withholding tax. If you withdraw up to $5,000, the withholding tax rate is 10%. If you withdraw between $5,001 and $15,000, the withholding tax rate is 20%. And if it’s more than $15,000, the rate is 30%. These tax rates apply in all provinces except Quebec, where provincial tax rates apply on top of the federal withholding tax.
There’s more: whatever you withdraw from your RRSP is also included in your taxable income for the year. So, if your marginal tax rate is higher than the withholding tax rate, you’ll have to pay more on the money you’ve withdrawn the following spring.
The bottom line: to avoid dipping into your retirement savings, be sure to stash your emergency funds in a separate account, like a Tax-Free Savings Account (TFSA).
Consider placing your emergency fund in a TFSA
The ideal emergency fund lets you see your money grow AND get access to it quickly and easily. Your best bet could be a tax-free savings account or a high-interest savings account. Your choice might depend on which is more important to you: potential growth or ease of access.
With a tax-free savings account (TFSA), you can grow your money with various kinds of investments, including bonds, stocks, mutual funds and exchange-traded funds – not just cash. Your investment return could potentially be in the high single- or even the low double-digits if your investments perform well. Or you could lose money if they don’t.
Just keep an eye on your contribution limit, which currently stands at $7,000 per year. This is in addition to whatever you had withdrawn from your TFSA in an earlier year and are now re-contributing. Unlike RRSP contributions, your TFSA contributions aren’t tax deductible. But because you’ve already paid income tax on the money you put in your TFSA, you won’t have to pay tax when you take it out. And any investment income you earn won’t be taxed – not even when you take the money out of your TFSA.
While a TFSA offers tax-free growth, the restrictions on the investments you hold in it might mean it will take a few days to withdraw your money. This could be highly inconvenient if rain is pouring through your roof or your car broke down miles from home.
To cover such situations, you could keep some money in a high-interest savings account. While these don’t offer the growth potential of a TFSA because you can’t hold investments in them, they do pay slightly more interest than an ordinary savings account.
The interest you get depends on your bank and your balance. Since your money isn’t locked in, it’s much easier to access it. Unlike a TFSA, there’s no limit to the amount you can put in a high-interest savings account, but you do have to pay income tax on the interest you earn. Note that you can have a registered high-interest savings account itself as a TFSA, in which case TFSA contribution limits and tax treatment apply.
Quick tips for building an emergency fund
1. Create a savings goal
Try to have 3-6 months of living expenses saved up. Calculate your essential monthly costs and multiply by your target number of months to determine your emergency fund goal.
2. Start small
If saving several months of expenses seems daunting, begin with a more modest target like $1,000. This can provide a psychological boost and protection against minor emergencies while you work towards a larger goal.
3. Automate your savings
Set up automatic transfers from your checking account to a dedicated savings account each payday. This "pay yourself first" approach ensures consistent contributions before you're tempted to spend the money elsewhere.
4. Do NOT rely on credit cards as an emergency fund
It’s tempting to use credit cards in a jam, but try to resist. Remember that credit cards charge high interest rates when you don’t pay your balance in full every month. Using your line of credit for fast cash may seem ideal, but remember it’s still money you must pay back. The interest rate might be lower, but the debt is still there. For emergencies, you’re better off avoiding the plastic and depending on your savings – like a TFSA – instead.
5. Keep your emergency fund accessible
Store your emergency fund in an account that's easily accessible but separate from your everyday checking account. This reduces the temptation to dip into it for non-emergencies while still earning some interest.
6. Replenish after use
If you need to tap into your emergency fund, make it a priority to rebuild it as soon as your financial situation stabilizes.
Building an emergency fund requires patience, but the financial security it provides is invaluable. By following these tips and making consistent efforts, you'll be better prepared to handle life's unexpected financial challenges without derailing your long-term financial goals.
Connect with an advisor near you
Not sure where to start with an emergency fund? An advisor can help you decide which savings option (it could be more than one) can help you grow your money during good times and have it on hand when hard times come along.
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This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting or taxation advice.
