Emergency Fund: Suggestion On How To Structure One!
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This article is general information, not financial advice. Rates, limits and offers change, so confirm current details with the source or a licensed professional.
Why is it important to have an emergency fund?
In recent weeks we’ve heard more and more companies take layoff actions against their employees, even the most profitable ones like Facebook, Google, Mcdonald’s and so forth. As for the unfortunate employee, it was regardless of tenure, their annual performance or their self-claimed value to the organization. Hypothetically speaking in the event you were someone impacted, an emergency fund would help you cover your monthly expenses for a period of time till you found a replacement job. Emergency funds can also help cover unexpected expenses like a water boiler (HVAC) starting to leak due to wear and tear of years of usage and needing replacement – this is exactly what happened to me and set me back $12,500! How much one decides to keep is totally up to personal preference, I’ve heard everything from as little as three months worth of monthly expenses to a year’s worth. In my opinion, six months is the sweet spot for most individuals however a year’s worth will cover you in all circumstances.
Video: 2023: Employer & Employee Relationships
Side note, If you do ever get laid off, never! ever! sign anything without consulting with an employment lawyer first. In Ontario, as an example, you could be entitled to as much as 24 months of pay regardless of your tenure or time on the job. Get a second opinion from a professional employment lawyer before you sign off on your severance pay or any other payout. Corporations will do what’s in their best interest and offer you the bare minimum so don’t leave dollars on the table.
Why can’t I just depend on EI (employment insurance) if I get laid off to bridge the gap?
In the event it is a work layoff the pro in Canada is you’ll be able to claim EI (if you got laid off, not fired), the con is it won’t last forever and depending on how much you make there could be a gap so it might not cover your full bi-weekly pay or not be enough to cover your monthly expenses. The max an individual can get for making $61,500 or more annually is $650 per week. Even if you made $100,000 annually you’d be out of luck and you’d still only get $650 per week. Also, it’s worth noting the maximum number of weeks an individual can get EI is 45 weeks. Hopefully, now you understand why you can’t “only” depend on employment insurance, however, it does cushion or help you stretch out your emergency funds further.
Video: Power Of An Emergency Fund
Where should you keep your emergency fund?
Most individuals will tell you to keep it in the form of cash in a high savings account so it’s very liquid and not in an investment account or locked-in GIC’s. But let’s be real with inflation having soared as high as 8.1% in June of 2022 which was a 39-year high or even as inflation maneuvers around 4.3% in March 2023 keeping cash means it’s losing value every single day!
So what should you do with your emergency funds? In my opinion, here’s what’s worked for me. I’ve kept two months of cash in my chequing account and four months’ worth in a cashable short-term investment vehicle. Now why does my style of holding onto emergency funds work for me and why should you consider it? Great questions if I may say so myself (LOL)
I’m the type of individual who used to review my finances on a weekly basis years ago – mainly because at one point in time my income was lower and I was truly living paycheque to paycheque and I just wanted to make sure all my bills were paid on time and my credit card balances didn’t build up. I was financially responsible but that responsibility also brought me the stress of checking often. As my income situation improved and knowing I wanted to check less often I reduced it to once every two weeks and now only checking once a month.
The reason I can check once a month now and not worry about not having enough is thanks to the two months’ worth of expenses sitting in cash in that account plus my employment income is also going into my primary chequing account, so at the bare minimum I’d always have two months plus of cash sloshing around. If you’re like me you’ll be able to relate and understand why I keep two of my six months of emergency cash in my primary account. Bigger balance = less stress = immediate emergency expenses covered.
As for the other four months worth, I keep it invested in a short-term cashable investment product that pays in correlation to the interest rate set by the Bank of Canada (usually a little less) but is still much better than any high-interest savings account I’ve come across in Canada so far. The three products I’ll talk about keep your principal 100% safe, while you’re earning a bit more in interest, but in the event the funds are needed you’d be able to access it within 24-48 hours. Let’s not forget you’ll have two months worth already in your main account so I think 24-48 hours is reasonable and very liquid while making more than most high-interest savings accounts.
It’s worth noting for my rental properties I also hold six months of emergency funds structured in the same fashion, two months in the chequing account and four months in a short-term cashable investment product (for each of my properties). Going back to types of emergencies, what if you have a leak, what if there are plumbing issues OR worse what if the tenant stops paying rent – we know the Ontario Tenant Board is backlogged currently (my polite way of saying slow, and again being nice by using the word slow). These emergency funds allow you to be prepared for all scenarios.
The three products I’ll talk about are from TD, RBC, and one from Purpose Investments as I’ve used all three of them personally. The ones from TD and RBC function more like mutual funds, however, neither of them charges any fees on an ongoing basis, nor when you buy it or sell it. However, the one from Purpose Investment functions like an ETF, and can be bought/sold on the TSX and the buy and sell fees do apply depending on the brokerage you use. It’s also worthwhile noting that both RBC and TD don’t allow you to purchase the Purpose Investment ETF on their platforms as they consider it a competitive product or that’s what I’ve been told by representatives from both banks. Also worth noting all three of them have various versions of the product tied to different products and currencies like CAD or USD.
The one from TD is called ISA (Investment Savings Account) and the specific one I’ve used is the “TDB8150”. The RBC one is also called an Investment Savings Account and the specific one I’ve used is the “RBF2010”. The one from Purpose Investment is called Purpose Cash Management Fund and the ETF I purchased was “MNY”. Now what’s the difference between TD, RBC versus Purpose Investment besides it being structured as a mutual fund or ETF? Well the TD and RBC ones only pay 4.05% interest rate (as of 05/2023) versus the Purpose Investment vehicle which pays 4.72%+, this also explains why TD and RBC don’t allow you to purchase the ETF via their platforms – they’d just see outflows of funds to Purpose Investment or other equivalent products as they payout a higher interest rate. Platforms like Wealthsimple and Questrade do allow you to buy the Purpose Investment ETFs on their platforms so take a look at your brokerage and see if it works.
What’s one disadvantage of all of these products? They’re tied to the interest rate moves of the Bank of Canada, so they might pay 4%+ for now but if interest rates drop we might have to revisit this article and consider other vehicles – but as of writing this blog, these products make a lot more sense than any high-interest savings account. One additional disadvantage of the ETF product is the management fee but still better than TD and RBC’s version once you take the fee of 0.20% off the top. The advantage of any of these products is that it closes the delta between current inflation rates and what you’d be making so your cash isn’t losing as much value.
This is just my experience and practice on how I keep and structure my emergency funds. What works for me might not work for you or you might want to keep all your emergency funds in a separate account and that’s totally up to you. This blog is just another perspective for you on emergency funds. It’s worth noting that are many other products out there similar to the ones explained here but I’ve decided to stick with these ones since I was familiar with them and know the principal was secure.
Final thought, it doesn’t matter how you structure your emergency fund, it just matters that you have sufficient funds for any emergency that comes up. It’s always nice to have that piece of mind knowing you’ve got yourself covered.
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Disclaimer: All content posted is solely for educational purposes and not intended as advice. Consider everything presented on our channels as educational and entertaining strategies accumulated over time. Prior to any actions, conduct your own due diligence.
P.S. An emergency fund will also save you from being in the following situation. Disclaimer, If you’ve recently lost your job or are sensitive the following humour might not be for you, otherwise, enjoy and have a good laugh!
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