You've likely heard the advice to start an emergency fund countless times. An emergency fund acts as a financial cushion for unexpected expenses like car repairs, medical or veterinary bills, home repairs, job loss, or other unforeseen events.
If you're currently keeping your emergency fund in a standard savings account, I'll show you how to maximize its potential and explore alternative options that might be more beneficial.
It’s generally recommended to save three to six months' worth of living expenses in a readily accessible account, so that the funds can be accessed quickly in emergencies.
The primary advantage of an emergency fund is the peace of mind it offers, as it ensures that you can handle unforeseen financial shocks without incurring high-interest debt in the form of payday loans or title loans.
Ultimately, it’s a safety net that helps maintain financial stability ensures that disruptions are just minor bumps in the road, rather than life-derailing events.
While it's crucial to have funds set aside for a rainy day, the issue lies in where most people keep these funds—typically in a regular savings account at their bank. The problem with this approach is the exceptionally low interest rates, often around 0.1 per cent or lower, offered by many of the big banks in Canada.
The two most important factors for where to keep your emergency fund are to make sure that it is safe, and highly liquid, meaning you can access the funds quickly. Here are some far better options for where to keep your money than a traditional savings account:
High-interest savings accounts offer significantly better interest rates compared to traditional savings accounts. Those provided by institutions outside the major banks in Canada tend to offer much higher returns. For example, I'm currently earning 4.5% on my savings. To illustrate, if you have $10,000 saved at 0.1% interest, you’d earn just $10 annually. But at 4.5%, you’d earn $450 annually.
Despite the higher returns, these accounts still provide easy access to your funds, making them a highly liquid and suitable option for emergency savings. This is where I typically keep all my emergency funds.
Redeemable GICs typically offer higher interest rates compared to traditional savings accounts. Unlike regular GICs, redeemable GICs allow you to access your funds before the maturity date, though there may be some penalties or reduced interest for early withdrawal.
Despite this, they still provide a reasonable level of liquidity, making them a secure place for your emergency fund while offering better returns.
High-interest savings ETFs invest in high-interest savings accounts and other low-risk financial instruments, offering higher returns while maintaining liquidity. These ETFs are traded on the stock exchange, providing easy access to your funds when needed.
All you’d have to do is sell the ETF then transfer it into your account. This makes them a highly liquid option, ensuring you can quickly get to your money in times of need.
Without a plan to save, it’s unlikely that you’ll ever be able to truly save anything of value. If you’re reading this and haven’t been able to meet your savings goals, then I recommend putting a plan in place.
You can start with something simple and easy, such as auto-drafting a small percentage of your paycheque from your chequing account to your emergency savings on pay day. Some people may also use apps and savings programs that allow you to round up your daily purchases to the next dollar.
Keep on reading for more great tips on how to automate your savings, so you can let your savings grow on autopilot, without ever having to think or stress about it.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on Blueprint Financial.
Do you have a question, tip or story idea about personal finance? Please email us at dotcom@bellmedia.ca.
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