Where to Put Emergency Fund?

With the recent pandemic, job loss, reduced hours, and financial uncertainty have been at the forefront of many of our minds.  Most people in the Canadian personal finance blogging realm, including myself, have decided that increasing the amount stashed within the emergency fund is needed.  Instead of three to six months of living expenses, I’m aiming for one to two years of living expenses.

Now that you’ve figured out how much to put in the emergency fund, another important question to ask is, where to put the emergency fund?  There are many places people can put their emergency fund, but one thing I would argue is that it’s better not to keep your emergency fund in a TFSA.

In this post, I’ll go over why an emergency fund is important, how to calculate exactly how much you need in your emergency fund, where you should put your emergency fund (for example, in an RRSA or TFSA), and what types of emergency fund vehicles are there (for example, high interest savings accounts, money market ETFs, and GICs).

Why An Emergency Fund is Important

As mentioned, an emergency fund is important to have because you never know what life will throw at you.  It is now more important than ever to have a healthy emergency fund.  I think very few people expected to lose their livelihood or have their hours reduced for at least three months with the social distancing rules in place.

Before the pandemic, I think people thought the emergency fund would be required if you needed a new roof suddenly.  Or if you  needed to replace your fridge.  Or you had a big condo assessment to pay for.  Or if your dog became sick and needed surgery.  Sure, these are big ticket items, but not as big as losing your income for months on end and still having essential costs such as shelter, food, and utilities to pay for.

Some other scenarios and emergency fund examples are if you have a sudden health condition and need to take time off work and don’t have sick time available.  Or if you have your own business and you have bills to pay but no revenue (as evidenced from restaurants and service oriented businesses during this pandemic).  Or if you have to take care of your sick parent and you are unable to work, a la sandwich generation.

One thing we don’t have to worry about are healthcare costs.  We are lucky to be in Canada because of our universal health care system.  A trip to the hospital in the US add up to more than $10,000 USD for a less than 24 hour stay for my husband.  We had travel insurance, thankfully.

An emergency fund is like a self-funded insurance policy.

Emergency Fund Calculator

How much do you need for your emergency fund?  Similar to saving for retirement, Instead of saving multiples of your income, I think it’s wise to save money in multiples of your monthly expenses.  Typically, people say three to six months of living expenses should be in your emergency fund.  However, as mentioned above, I think it’s wise to aim for longer if you can.

Get Smarter About Money (a fantastic free website from the Ontario Securities Commission) has a free emergency fund calculator for you to figure out exactly how much you should save for your emergency fund.  It is based on your monthly expenses.

Where to Park the Emergency Fund: Non-Registered?  TFSA? or RRSP?

Now that you know how much to build your emergency fund up to, where is the best place for the emergency fund?  Where do you put the emergency fund?

The best place to park the emergency fund, in my opinion, is NOT the TFSA or the RRSP.  The Tax Free Savings Account may be called a ‘savings’ account but that is a façade.  The income tax that you save by parking your money earning 2% in a TFSA is actually quite insignificant.

Why?

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Let’s say you have a $15,000 emergency fund that earns 2% interest.  That’s $300 of interest income in one year.

And your annual income is $75,000.

Your marginal tax rate is 28.20% if you live in B.C. and it is current as of July 2020 (see the Thompson Reuters chart above)

That’s $84.60 of the $300.

Relatively, sure, that’s a lot percentage wise, but if you think in absolute terms, it’s not that much.

$84.60 to take up $15,000 of room in your precious money making TFSA when you could be using it to earn more money and build a six figure TFSA portfolio.

That’s why I think that the TFSA is best used as an investment vehicle.

That being said, if you have TONS of room in your TFSA and are not near maxing it out, then yes, by all means, you should use it to put your emergency fund, since interest income is taxed at marginal rate and that can be quite high.

So, the emergency fund should not be in the TFSA or RRSP if you are running out of the room in your TFSA or RRSP.  So where to put the emergency fund?  Under your pillow?  In a high interest savings account?  In a GIC?  Or Laddered GICs?  Or in a Money Market ETF?

High Interest Savings Account

One of the more popular ways to put the emergency fund is in a high interest savings account.  Typically these are online only banks (saves the brick and mortar expenses and the cost savings are passed on to you).  With HISAs, you don’t have to lock in your money and you can take your money out any time.

The rate is subject to change though.  Since earlier this year, the interest rates on some of my high interest savings accounts have decreased by 1.30%.  Bummer, but we are in a low interest rate environment.

You can have joint high interest savings accounts (not all HISA providers have joint account availability) and your investment up to $100,000 at each financial institution is protected by Canadian Deposit Insurance Corporation.

Related: The Best High Interest Savings Accounts in Canada

Here are some of my reviews of the highest interest HISA banks out there right now:

• Motive Savvy Savings Account
• EQ Bank Savings Plus Account
• LBC Digital 
• Canadian Tire High Interest Savings Account

GICs (Guaranteed InVestment Certificates)

GIC’s are short for Guaranteed Investment Certificate.  When you invest your money in a GIC, you are guaranteed your principal and are guaranteed the interest that was agreed upon.  The caveat is that you invest your money in the GIC for a specified term, and this is anywhere from 30 days to 5 years.  At the end of the agreed upon term, you will receive the interest income.

This can be beneficial when you are in an environment where the interest rate is rapidly changing (and lowering), and you really don’t need the money for a while.  For example, when the interest rates were lowering dramatically in March 2020 seemingly week after week, I took advantage of the EQ Bank GIC offer, which was 2.45% at the time.  It was only for three months anyways.

Related: HISA vs GIC Where to Park Your Cash?

A GIC can work better than a HISA in the above situation, where the interest rates are rapidly changing and the GIC rates are better than the HISA rates.  Typically I find, though, is that the HISA rates are higher than the GIC rates.

Money Market ETFs And High INterest Savings ETFs

Another option that provides more liquidity and is typically meant for investment purposes (hence it is really not an emergency fund) are Money Market ETFs or High Interest Savings ETFs.  I guess it could be an emergency fund if you view investing your money in the stock market during opportune times an ’emergency’, haha.

The rates for these are not as good as High Interest Savings Accounts but if you need money to invest quickly, accessing this is easier than accessing cash from a high interest savings account (and definitely compared to a GIC).  Selling an ETF would be faster than transferring money from your high interest savings account into your brokerage account.

Some examples are Purpose High Interest Savings ETF and iShares Premium Money Market ETF.  These have an MER attached to it and also there are trading commissions to buy and sell.  However, if you use Questrade as a discount brokerage, there is no commission to buy.

Purpose High Interest Savings ETF has $2.5 billion assets under management (AUM) and an MER of 0.16%.  In 2019, the return was 2.19%.  Distributions are monthly.  Purpose has the lion’s share of the high interest savings accounts ETFs in Canada.  The ticker symbol is PSA and it is traded on the TSX.

Another is the iShares Premium Money Market ETF.  In 2019 the return was 1.6% and the MER is 0.28%.  Assets under management is just over $500 million.

In summary think that the best option to put your emergency fund is within a high interest savings account. They are flexible, liquid, and the interest rates are just as competitive as with GICs (or even better).  They also have higher interest rates than money market ETFs too and there are no Management Expense Ratios to deal with.

I also often keep part of my emergency fund as the minimum amount of cash to prevent bank account fees and also get perks like free personal cheques.

Where do you park your emergency fund?