# Unnecessarily large safety net - best usage?



## aspiring_potato (Jun 1, 2011)

Hi everyone, happy new year!

I'm looking to put my finances in order and hoping for a bit of advice. I have about 45k sitting around in a savings account and want to allocate it intelligently.

I currently have:
- Maxed out TFSA (e-series, only 20% bonds)
- About 1.5k in an RRSP (e-series)
- Mortgage (variable rate) with about 140k left on it

I personally need a good safety net to prevent stressing out but I think 45k is much more than I need and it is sitting around doing nothing. I am 28 and income is now 53k.

1 - How much do you think I should keep liquid / as safety net (~6 mo expenses?)

2 - How much should I put in the mortgage, vs an unregistered e-series account, vs RRSP (smartest amount to put in, or defer)?

3 - Should my unregistered account be less aggressive perhaps or is it ok to have all my investments with the same allocation?

Any advice appreciated.


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## the-royal-mail (Dec 11, 2009)

This is easy. I'll leave my sig file active so you can see my proposed layout.

The first thing to get out of your mind is the rhetoric about the money "sitting around" in a savings account. That is golden, for you. Why should you take investment risk with it while feeding banks their fees on your money? Keep your money there in case of a rainy day and if investing is important to you, do it with future play money.

Typical rainy day savings goal is 6-12 months of living expenses unaided, for tier 1. And even at that you will find that if you ever need that money, 12 months won't be as long as it seems to you now.

Do you have any capital expenses in the future? This is stuff like a new car, new roof, bathroom or kitchen reno, braces for junior, something like that? Anything like this you might want to buy?


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## MrMatt (Dec 21, 2011)

However I agree your e-fund is a bit big, after EI (if you qualify) and taxes, and assumptions on your savings rate it looks like you've got about 2-2.5 years of living expenses.

Depending on your career stability this might be alright, I'd sit at 1 year if you have no dependants, you can include EI or not if you wish. 
Most important is that YOU can feel comfortable with the efund you have, you clearly worked hard to get it, you might as well get a good nights sleep from it. I don't think 2 years would be that excessive if that's what it takes for you.

In your situation I get indecisive, so I'd put half into RRSP, and half into mortgage prepayments.


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## Cal (Jun 17, 2009)

How stable is your job/income?

How much RRSP contribution room do you have available?


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## Sherlock (Apr 18, 2010)

Instead of an unregistered e-series account, why wouldn't you invest the unregistered portion of your portfolio in dividend paying stocks or ETFs, as dividends are taxed much more favorably than capital gains.


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## Sherlock (Apr 18, 2010)

the-royal-mail said:


> The first thing to get out of your mind is the rhetoric about the money "sitting around" in a savings account. That is golden, for you. Why should you take investment risk with it while feeding banks their fees on your money? Keep your money there in case of a rainy day and if investing is important to you, do it with future play money.


What fees are you talking about? Banks pay YOU (in the form of dividends), not the other way around. That 45,000 invested in something very safe like bank stocks could yield well over $2000 a year.


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## aspiring_potato (Jun 1, 2011)

Thanks for all the answers! I'll try to respond to everything.



the-royal-mail said:


> This is easy. I'll leave my sig file active so you can see my proposed layout.
> 
> The first thing to get out of your mind is the rhetoric about the money "sitting around" in a savings account. That is golden, for you. Why should you take investment risk with it while feeding banks their fees on your money? Keep your money there in case of a rainy day and if investing is important to you, do it with future play money.
> 
> ...


I think I would feel comfortable with maybe 20k liquid. I could always cash in the TFSA money if things got REALLY desperate. My job is stable and my wife is working as well, so there is a decent safety net. No kids and no major expenses coming up, and I'd be able to save up some extra if something does come up.



MrMatt said:


> However I agree your e-fund is a bit big, after EI (if you qualify) and taxes, and assumptions on your savings rate it looks like you've got about 2-2.5 years of living expenses.
> 
> Depending on your career stability this might be alright, I'd sit at 1 year if you have no dependants, you can include EI or not if you wish.
> Most important is that YOU can feel comfortable with the efund you have, you clearly worked hard to get it, you might as well get a good nights sleep from it. I don't think 2 years would be that excessive if that's what it takes for you.
> ...


I think I can live with 1 year. What kind of ramifications would putting a large chunk in the RRSP have? Am I killing room I could be carrying forward?



Cal said:


> How stable is your job/income?
> 
> How much RRSP contribution room do you have available?


Job is very stable. I have only contributed 1500 in an RRSP so I'm guessing a lot of room.



Sherlock said:


> Instead of an unregistered e-series account, why wouldn't you invest the unregistered portion of your portfolio in dividend paying stocks or ETFs, as dividends are taxed much more favorably than capital gains.


The honest answer is that I don't know anything about stocks or ETFs. I could probably wrap my head around ETFs (from what I understand, just the building blocks of my indexes) but unlikely to venture into stocks. Is it worth it (hassle+transaction fees) for the amount of money I'd be investing? How big of a tax difference are we talking?


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## MrMatt (Dec 21, 2011)

aspiring_potato said:


> Thanks for all the answers! I'll try to respond to everything.
> 
> 
> 
> ...


Well I'd consider the TFSA the emergency fund, unless you are loading that up with equities.

Putting the money in the RRSP is fine, assuming you have room you don't have to claim the max every year, so you could contribute now and claim it in years you have less.

Regarding the different between index funds and index ETFS, it's just a question of fees and commisisons. 
Other mutual funds and ETFs vary widely in what they actually contain and what they provide.
Picking individual stocks, likely not a good idea when you can get a good diverse mutual fund. 

Current research suggest an index fund based portfolio is the way to go.


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## aspiring_potato (Jun 1, 2011)

MrMatt said:


> Well I'd consider the TFSA the emergency fund, unless you are loading that up with equities.
> 
> Putting the money in the RRSP is fine, assuming you have room you don't have to claim the max every year, so you could contribute now and claim it in years you have less.
> 
> ...



Yeah the TFSA is loaded with equities actually. I am sticking with index funds as it's what I'm comfortable with for now. I'll minimize taxes with the RRSP, max the TFSA, put some in the mortgage, and put some in something guaranteed, just to have a bit of everything I guess.


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## randomthoughts (May 23, 2010)

I would consider repeatedly putting sizable chunks into your RRSP (maybe use that for your guaranteed instruments, in things that are cashable early with an interest penalty). This would take care of your 'guaranteed' bit and back up a bit of your emergency fund.

Repeatedly - because you'll want to maximize your income tax refund. So it could be as much as it takes to move you down a bracket each year.

Emergency fund - because if you are in dire straits (no/low income), then taking money out of your RRSP is cheap because you're in a low tax bracket. Granted, with two earners in the family, you may never be in enough trouble to need to do this/reap the ultra-low tax withdrawal... but at least the money will be growing tax free. (I know if I'm ever without income, I'll definitely be taking out the personal allowance/tax free amount out of the RRSP!)


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## OhGreatGuru (May 24, 2009)

Sounds like you have about $25k you are willing to "invest", or at least tie up in something less liquid than cash.
- If you don't know your RRSP room look at your last statement from CRA - it will tell you there.
- Put as much as you can in your RRSP. You don't have to deduct it all in the year of contribution - just deduct enough to lower your tax bracket, and carry the rest forward to use in another year.
- Use the tax refund to pay down your mortgage - that is your best guaranteed return investment.
- If your TFSA is part of your safety fund, you should probably go easy on the proportion of equity in it for now.

PS: Actually, you should probably set up a mortgage payment table, and see if you would save more by paying down the mortgage instead of contributing to your TFSA.


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## the-royal-mail (Dec 11, 2009)

I remain uncomfortable with the notion that a well-fortified emergency fund is "doing nothing" just because it's in cash. Who told you it was doing nothing? I know that banks and the like would just love it if we would invest our efunds in their MFs so we can start paying them guaranteed MERs. Is that where the idea comes from? Because frankly, the point of an emergency fund is not for growth of capital, it's for protection of your and your family's security in case of an emergency. And to help you sleep at night and not worry about stock market crashes or fees taking down your cash and making it inaccessible to you at the time you need it most. I see no valid reason why banks or anyone should be entitled to MERs and other fees on those funds.


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## MrMatt (Dec 21, 2011)

aspiring_potato said:


> ...
> I think I can live with 1 year. What kind of ramifications would putting a large chunk in the RRSP have? Am I killing room I could be carrying forward?


If you have the room you can contribute today, but don't have to CLAIM the contributions this year.
So you could contribute a large amount, claim enough to bring you down to the next income tax bracket, then save leftovers for next year.

Someone can whip up an example if you need it.

You should do this if for some reason you have a lot of deductions and end up in a lower tax rate than you expect to be next year.


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## Kalergie (Jan 7, 2011)

I agree with TRM on this one. I am probably the biggest supporter of TRM's theory of a well funded emergency reserve in cash. I love liquidity. I have 12 months living expenses in cash waiting for me if I really need it. It is my insurance for my personal nightmare scenario: Having to beg for money at my bank! 

And for people who may think that their LOC may help them in such cases. Forget it. I recently had a discussion with my representative from Scotia and I asked him what if I lose my job and needed to use the LOC. He laughed and said that if I lost my income, the LOC would be withdrawn.


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## Four Pillars (Apr 5, 2009)

Kalergie said:


> And for people who may think that their LOC may help them in such cases. Forget it. I recently had a discussion with my representative from Scotia and I asked him what if I lose my job and needed to use the LOC. He laughed and said that if I lost my income, the LOC would be withdrawn.


This is nonsense. First of all, they don't know if you are working or not and second - I've known many people who get laid off, quit to start businesses, retired and not one of them had any issues with access to existing credit lines.


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## Kalergie (Jan 7, 2011)

That is probably the case for your friends but I can only go with what my bank tells me and I would not want to take the risk.


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## Sampson (Apr 3, 2009)

Kalergie said:


> I can only go with what my bank tells me and I would not want to take the risk.


Of course if you tell the bank you are unable to make interest payments on their LOC, they will pull it, but as FP states, how would they ever know unless you told them?

Saving cash is good, but at some point there really is too much. How can you have too much cash? Well if it means you are losing money to the effects of inflation, and you have to work 5-10 years longer than your neighbor under the same conditions, well that's too much cash.

What can never really be argued (well it can be argued, but no agreement will ever be reached) is how much risk should a person take. Some are willing and justified to take more, others are justified but can't sleep at night, and some people shouldn't take any at all.

In the case of the OP, he/she has well more than 12 -months of e-fund. In my mind, there is a huge opportunity cost for him/her not to mobilize at least some of it.


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## Jon_Snow (May 20, 2009)

As someone who as of right now has a 7 year emergency fund, I think I am qualified to give the OP absolutely NO advice on this subject.


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## MrMatt (Dec 21, 2011)

Kalergie said:


> I agree with TRM on this one. I am probably the biggest supporter of TRM's theory of a well funded emergency reserve in cash. I love liquidity. I have 12 months living expenses in cash waiting for me if I really need it. It is my insurance for my personal nightmare scenario: Having to beg for money at my bank!
> 
> And for people who may think that their LOC may help them in such cases. Forget it. I recently had a discussion with my representative from Scotia and I asked him what if I lose my job and needed to use the LOC. He laughed and said that if I lost my income, the LOC would be withdrawn.



Unemployment is only one emergency fund use.
To handle Expensive Car repairs/replacement, emergency house repairs etc you might need substantial (for your situation) access to money. For this a LOC is just fine.
Unemployment financial crisis shouldn't start immediately. You should generally get a few weeks of pay, some EI etc. 

I guess what I'm trying to say is that emergency funds have 2 different time horizons, Very very short with no warning, and a slightly longer, but still short (weeks/months) initial draw.
I agree a LOC isn't the most suitable unemployment fund.



Jon_Snow said:


> As someone who as of right now has a 7 year emergency fund, I think I am qualified to give the OP absolutely NO advice on this subject.


Sure you are, the value in forums comes from the "nonstandard" cases, not the rule thumb guidance that is applicable to the median person.

It might be interesting to know how a 7 year emergency fund is structured.


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## londoncalling (Sep 17, 2011)

I am also curious as to why one would need/want a 7 year e-fund. If one has ample savings in general, 7 years may not be that large a percentage of savings. For many years, I did not have nor want an emergency fund. After some convincing by TRM and others on this forum I finally, caved to my wife's desire to have an emergency fund in place. I do have ample LOC room which I considered my emergency fund. Now we have started an emergency fund that sits in my wife's TFSA. I would consider 3 months enough for us for loss of employment here in Canada due to things such as EI, 2 person income etc. My wife and I survived for close to a year on one income on more than one occasion and could do it again if one of us lost our job.

Similar to TRM's 3 tiers I consider separate savings are needed for emergency vehicle/home repair from loss of employment e savings. We also started a savings account for holiday funds/major purchases that are not needs but are wants. We have a long way to go in regard to budgeting if we want to retire early. Not that I desire early retirement right now as I love my job but who knows if I will still feel the same in 20? 30? years.

My wife and I tend to "pay" ourselves first. Mortgage, LOC, CC(paid in full monthly) payments, RRSP, TFSA contibutions, bills etc. Then use the rest of disposable income. I know we could be more frugal at times (we enjoying dining out, but occasionally get lazy and do it more often than needed).

We could also be more aggressive on our mortgage repayment and pump our savings(which we plan to do with income increases(such as pay raises, overtime side jobs etc). However, I think we are progressing satisfactorily. We use our net worth exclusive RE appreciation and vehicle at 0 value as guidance. I'm not sure if this gives an accurate projection of net worth and wouldn't use it as a means for the bank but for personal guidance it prevents me from relying on false hope that may disappear if a bubble bursts. We have added value to our home through renovations(bought a fixer upper in the true sense not just cosmetic) but have not included this in our net worth. Perhaps when it is time to renew the mortgage in about 18 months we will get an appraisal and give it a safety margin of about 50%-75%. for me a shotgun scatter approach seems to suit my mindset and as long as balances in all parts of my savings are heading in the right direction I can feel at ease. I know I may be losing out on some money by carrying my mortgage an extra year or two but it seems to work for me so far. I am always open to criticism as I think one needs to have their mistakes pointed out to them and hope that I would consider any advice seriously as making a tweak here or there could result in a better system.

I have seen several people scrimp and save their entire lives only to die 3-6 months into retirement. So for that reason I try to find some balance and live for tomorrow but not with the exclusion of today. 

Perhaps if further explanation as to why one needs/wants/has a 1 year, 2 year or 7 year e fund and how it is structured would convince me to change from 3 months to 6 months or even a year as a target. As it stands right now I am content with 3 months e savings and would concentrate my efforts on eliminating my LOC and mortgage before adding to emergency savings, and non sheltered investing.


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## Jon_Snow (May 20, 2009)

Just looked at our numbers again... our cash component is sitting at just above 230k.... we live quite nicely on 30k per year, and thus this cash could theoretically keep us going for many years.

But in reality, I don't consider this money an "e-fund"... it is simply cash that is piling up due to our high savings rate (65%) . We simply don't have a concrete plan of what to do with it. Too many options overwhelms us at times. I have a decent amount in the markets, but I am still in "learning mode" and feel uneasy about piling this idle cash into the markets at this time. If a significant correction were to occur, my thinking might change.


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