The Return of the Emergency Fund

By Ryan Goldsman, CFP®, PAIP®

            Growing up we heard about responsibility and the many things we had to do in order to become a “responsible adult”. While many of those things were correct, like buying car insurance, there’s one thing that seems to have skipped a generation: the emergency fund.

            As a result of historically low interest rates which started in 2009, the past 12 to 13 years has seen a drastic reduction of young adults acting prudently, at least financially. After all, why would anyone save thousands of dollars in a liquid investment, usually a savings account, to receive nothing in return?

            Over the past decade, it made far more sense to obtain a line of credit should an emergency occur – interest rates were as low as possible. Today’s problem is a little different however. With a generation of young Canadians in more debt than ever before, and interest rates rising, the need for an emergency fund seems to have snuck up on us… like a burglar in the night, but yet we knew this day would come.

            If we asked professionals in Canada’s financial industry, the most popular answer would be that working Canadians should have a minimum of three months’ salary (or three months’ expenses) in an emergency fund, sometimes more. Depending on the specific training required for one’s profession, there can sometimes be a need for a far greater amount of “protection”. Although the job market is booming as we speak, momentum rarely continues on forever. History has taught us that markets rise and fall. There are bull markets and bear markets in all places, including the job market.

            For those who want to implement an emergency fund for the first time, there are several things to know. The first, is the amount saved must be safe. That means that it sits inside a bank account or a cashable fixed-rate deposit. The second is the money must be liquid, so purchasing a 5-year guaranteed investment certificate is not the way to go. Congruent with this point, the money should be inside of a tax-free savings account or a non-registered account, but not a retirement savings plan.

            Again, the main point of an emergency fund is that the money is there in case of an emergency. It’s accessible without any penalty or major tax consequence, not only in case of a job loss or rising interest rates, but for actual emergencies as well. Safety first.