Think slowing your financial ‘burn rate’ can stand in for an emergency fund? Here’s why it might not keep you afloat for long

If you’re furloughed or lose your job, do you know how much money you’d need to bridge the gap until you’re getting a paycheque again?

That gap is called your ‘burn rate’ — a term that was originally coined to describe how startup companies track cash before they become profitable.

But it can also apply to regular people, too.

Employment was up by 67,000 in October, following a cumulative decline of 106,000 during July and August, according to data from Statistics Canada (1). Moreover, the unemployment rate fell to 6.9% after two months of sitting at 7.1%.

A burn rate isn’t the same thing as an emergency fund. A burn rate is a measure of your monthly spending, while an emergency fund refers to money set aside to cover overseen expenses, such as a job loss or a major repair to your home.

You can slow your burn rate — but it’s not a replacement for an emergency fund. Here’s why it might not keep you afloat for long.

How you can slow your burn rate

One of the most obvious ways to slow your burn rate is to reduce your spending, from cutting back on unnecessary expenses such as dining out, to pausing financial goals such as saving for a down payment or contributing to an RRSP.

But that can be easier said than done from a psychological perspective. Joe Young of Mercer Advisors told The Wall Street Journal (2) that he advises clients to think about reining in their spending over three months. “If we say it’s in perpetuity, it’s a little bit harder to stomach.”

If you don’t have a budget, it’s a good time to create one — and to clean house. You might be surprised how much you’re spending on discretionary items like clothes and personal care products.

And there may be some expenses you can cut out permanently, like monthly subscriptions that you forgot you were even paying for. How many times have you signed up for a free trial and forgotten to cancel?

When it comes to necessary expenses, like your mortgage or rent, utility bills and car payments, you could consider calling your creditors to see if you could pause payments for a brief period (to avoid damaging your credit score).

Try to make at least the minimum payment on your credit cards to avoid late fees and penalty interest rates (it will also negatively impact your credit score).

You may even be able to negotiate a lower interest rate on your credit card. In the past year, 83% of those who asked for a lower interest rate on a credit card got one, according to a LendingTree survey (3).

To slow your burn rate over the longer term, you could also look for ways to bring in passive income, such as renting out a room in your house or getting a roommate.

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How to build an emergency fund

While a burn rate can slow your spending, it won’t help if you only have a few hundred bucks in savings.

A majority of Canadians under 55 say they couldn’t handle a sudden expense of more than $1,000 in the coming month, according to data from the Angus Reid Institute. Additionally, three out of 10 mortgage-holders (29%) and 45% of renters say anything more than a one-time unexpected expense of $250 would “break the bank for them (4).”

An RBC poll also found that half (50%) of Canadians are spending all their income on essential bills and expenses. Almost half (47%) are living “bill to bill,” dipping into their emergency fund or retirement savings to cope (5).

This is also impacting their retirement goals. Polling data from Edward Jones Canada found that only 39% of Canadians intend to contribute to their RRSPs in 2025 in the face of high living costs and debt burdens (6).

While a burn rate is a reactive strategy, having an emergency fund is a proactive strategy. Of course, this should start long before you’re in a position to need those funds.

An emergency fund provides a safety net for a sudden expense (such as a roof repair) or a sudden loss of income (like a job loss). Without one, you may have to rely on credit cards or loans to pay certain bills, which racks up more debt — and more interest.

Most financial experts recommend having at least three to six months’ worth of living expenses in an emergency fund. And it should be set aside in a dedicated account — preferably one that’s both liquid and earns interest, like a high-interest savings account (HISA).

To determine how much you’d need to cover three to six months of expenses, you’ll first need to come up with a budget (if you don’t already have one): calculate your total income and total fixed expenses. If you need $4,000 a month, for example, you’ll want to work toward saving $12,000 to $24,000 in your emergency fund.

That’s still a significant amount of cash, so start by setting aside a portion of your paycheque until you build up that emergency savings account. You could consider direct deposits from your paycheque to your savings account, so it’s automatic. You could also beef up your emergency fund with one-time payments, like a tax refund or bonus at work.

However, if you’ve been laid off or furloughed, it doesn’t hurt to slow your burn rate — even if you do have an emergency fund — since that can make your emergency fund stretch even further.

Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Statistics Canada (1); Wall Street Journal (2); LendingTree (3); Angus Reid Institute (4); RBC (5); Edward Jones (6);