The best practice around emergency funds is that you should have at least three months’ worth of critical household expenses (rent or mortgage, condo fees, utilities, groceries, etc.) set aside in case an emergency happens.
The exception is if you are heavily indebted, in which case, some financial experts suggest you could keep as little as $1,000 in your emergency fund, and put the rest of your available money toward paying off your high-interest debts like credit card balances.
Your emergency fund needs to be readily available, typically within 24 hours.
But if you’re anything like me, the thought of having your emergency fund sit around in an old-fashioned savings account, not earning much interest, is irritating. I like my money to work for me.
Here are two ways to put your emergency fund to good use, without putting it at risk:
Save the interest on a traditional line of credit
If you owe money on a revolving line of credit, you can pay off the balance using your emergency fund. This move will save you money on the interest you would have otherwise paid towards your line of credit. At today’s rates, this can add up to many hundreds of dollars in savings every month. But don’t do this if it is a collapsible line of credit, which means that as you pay it down, you lose the available balance. In the event of an emergency, you will still need to access your line of credit to pay for the unexpected costs.
Invest the money in a cashable (redeemable) GIC or the highest rate savings account on the market
GICs traditionally offer a higher rate compared to a high-interest savings account. The caveat here is that the GIC you select can’t be locked in, or you’ll have trouble redeeming your funds quickly during an emergency, and you’ll lose the interest you would have otherwise earned.
Right now, there are some competitive high-interest saving account rates that rival GIC rates. You’ll need to investigate what’s available and go with whatever rate is highest.
Supercharge this strategy by tucking that GIC or high-interest savings account into your Tax-Free Savings Account (if you have room) so that you don’t pay any taxes on the interest that you earn. I’d also highly recommend automating your savings contributions so that your account balance grows with each paycheque.
Certainly there are many other ways you can deploy your emergency fund money, but the ones that earn you a higher return, also tend to have more risk than what I’ve outlined above.
Your emergency fund is the one piece of your overall portfolio that should not be exposed to too much risk. And statistically speaking, an emergency will happen in the next decade of your life, so you need to be prepared.
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