With the COVID-19 crisis, the need for an emergency fund has become increasingly evident. Unemployment has hit some spectacularly high numbers, with as many 2mm jobs lost in April in Canada (source), and as many as as 1.5mm individuals in the US filing for unemployment benefits (source). Employment Insurance—in Canada at least—is not meant to replace your entire income, but merely to supplement it. And to complicate matters some folks only get the Canada Emergency Response Benefit which amounts to $500/week ($2,000/month). Recent indicators show that in some cities that $2,000 barely covers rent, and in Toronto it doesn’t even cover it based on numbers from rentals.ca, which peg the average rent at $2,103 in Toronto for June 2020 (see chart at end of article)
An emergency fund is one of the foundational blocks of a good financial plan. Our good friends at reddit tag it as the second thing you should do, after budgeting, and financial gurus such as Dave Ramsey set it as the first thing you should do (truthfully, Ramsey has it as the first and third things, the third being a bigger emergency fund). By now we’ve all heard the news of people being underwater, businesses suffering, and general anxiety of not knowing where your next paycheque is coming from. But if you have six months of expenses saved away, you can live virtually stress free for at least a few weeks while things settle down. Personally I follow the six month approach to an emergency fund, which is roughly 13 of my net paycheques, since I get paid bi-weekly (26 times per year). This means that if I am out of work, notwithstanding unemployment insurance, I have at least half a year of savings to draw down from.
But, just because you can’t touch the money, doesn’t mean you shouldn’t have it work for you.
Conventionally folks would stick the emergency fund in a High Interest Savings Account. Current rates (as of June 2020) have HISA rates between 1.69% and 2.00% according to our friends at ratehub.ca:
|Tangerine||2.80% (for first 165 days)|
The challenge is that if rates crumble, it won’t be long before HISA rates fall as well.
I’d like to lock in my interest rate, but at the same time, keep my emergency fund liquid. To accomplish this I reframed my emergency fund not as a 13-week buffer (~180 days), but as two 90-day buffers:
- Take half of my effective emergency fund (90 days worth of expenses), and invest it in a 90-day GIC.
- If something were to happen, I would have the remaining 90 days worth of emergency funds to leverage, and by the time those 90 days were up, the 90-day GIC would have matured.
This method allows me to lock in rates, not worry about rates falling, and most importantly: guaranty liquidity of my emergency funds.
I opted to open a 90-day GIC with EQ Bank because at the time it had the best 90 day rates available. The entire process took me about an hour (opening an account, transferring funds, and then purchasing a GIC). But that one hour of work netted me a little over $100 in interest from the GIC, which in my mind was worth the time and effort.
Onwards and upwards!