# Emergency fund VS Mortgage



## jamesbe (May 8, 2010)

Racking my brain and it seems like I need some help.

Mortgage currently $335,000 -- Interest rate 2.150% (variable)

Currently I have $60,000 in a HISA with Ally bank. I believe they are paying 1.8% currently... also variable.

RRSP Maxed
TFSA Maxed (valued at about $60k at the moment).

I also own an investment property, interest rate on that is 4.5% but that's tax deductible, can't pay much on it anyways due the mortgage restriction.

I originally was keeping the money in my HISA for an emergency fund. It was originally $40,000 and I felt that was a good number, the number I wanted to have based on a years worth of expenses and misc.

I sold a vehicle and dumped another $20k in there. I'm almost like a money hoarder at this point. I see it there, so I like it there. It's not earning "nothing" at least at 1.8%.

But the mortgage is 2.15% So SLIGHTLY more.

I'm not as good as math as I once was, never really been good with compound interest formulas. From what I can figure out I'm "losing" 0.35% on my money in my HISA compared to having it in the Mortgage. But I am gaining the security feeling.

What are you thoughts? Should I forget the emergency fund (or maybe a large portion of it) and dump that on the mortgage. Is the advantage more than the 0.35%? Am I doing that correctly?

My plan was always to wait until my Mortgage rate rises, if it does I put money on it. If rates rise, the savings account will most likely also rise.

Thoughts? Help?


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## brad (May 22, 2009)

What's your TFSA for, and is it relatively liquid? If so, I would say use that as your emergency fund and dump the $60K in your HISA into your mortgage.

Of course you could also invest the $60K that's currently your e-fund outside of your RRSP, which may have tax advantages since capital gains and dividends are taxed more lightly than interest.

If you use your TFSA as your emergency fund it would be a no-brainer. If you think about it, the interest you're paying on your mortgage is paid for with after-tax money, so in effect it's higher than the 2.15% you cite.


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## jamesbe (May 8, 2010)

Good point about after-tax money. The interest on the HISA is also pre-tax. So even a wider spread.

The TFSA is somewhat liquid. Major stocks like bell, scotia, some energy etc.


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

As Kevin O would say, 'I forbid you to do this'.

What will happen if the sky falls on your head tomorrow? Even if you dump every penny of your cash into your mortgage, the mortgage -- and the monthly payments, will still be there. It's not a good idea to put all your eggs in a single basket like that. Seriously consider what your life would be like if you lost all your income tomorrow. It could happen. You would still have to make your mortgage payments, might not get EI and then what?

Your gut is telling you to keep the cash. Hard to disagree with that. Don't be swayed by rhetoric.


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## brad (May 22, 2009)

jamesbe said:


> The TFSA is somewhat liquid. Major stocks like bell, scotia, some energy etc.


Somewhat liquid, but more than somewhat risky. I agree with TRM that you don't want to lose your emergency fund, I was just thinking that if you could treat your TFSA as an emergency fund you wouldn't need $120,000 sitting around waiting for something to happen. The $60K in your TFSA could drop to $20K in a day or two if the stock market had a big crash; it's unlikely but possible, so you can't really rely on that money being there if you end up needing it. So the choice is a little harder now. Maybe take $20K out of your $60K emergency fund to bring you back to your target of $40K in your emergency fund, and put the $20K into your mortgage. That's a guaranteed savings, increased equity, and lower interest payments.


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## jamesbe (May 8, 2010)

Didn't say I would use all of it. I also have other savings Another $5k in savings and $10k in chequeing....

I guess I need to see the math. If I put say $40k on the mortgage, what's the difference in interest payment vs income from HISA. Is it worth it?

Job loss is possible but to go to zero income tomorrow would be unlikely as I have 2 full time jobs. So I don't think I would lose both but one could disppear at any time.


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## Sherlock (Apr 18, 2010)

I think 60k is too big for an emergency fund, especially since you have other assets (TFSA) that you can tap into. I would put a big chunk of that HISA into the mortgage.


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## DanFo (Apr 9, 2011)

scotia bank has a nice calculator you can play with to see what kind of interest savings you will get with various lump sum payments... http://cgi.scotiabank.com/mortgage/Scotiabank-LTSB-English.html I'd say go ahead and put at least a llttle of the extra savings against it but just ensure you have enough back to make you comfortable...it's amazing just how much interest a 20k lump some will save you on a 335K mortgage


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## Young&Ambitious (Aug 11, 2010)

If you lost a job, got sick, injured, have a relative who relies on you for support, possible car/home repairs, etcetc you would certainly need to use that emergency fund. And if some major catastrophe happened, you even have a LOC to dig into. BUT how likely are all of those things to happen and require immediate cash access? 

I would imagine that at $60,000 you have too much of an emergency fund. Especially since you have an extra $15k in cash and a fully funded TFSA kicking around. But, on the other hand, you have to be comfortable with your decision and able to sleep at night.


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

I don't see this as a math question at all. The point of an e fund is not to generate income, but to provide safety and peace of mind. You said it yourself above "I see it there, so I like it there." The value of an e fund is in its simple presense. What you are considering erodes that value in whole or in part.

Job loss isn't the only reason you could lose income. You could become disabled, divorced or end up like the travelling couple who ended up with $100K of hospital bills. There are many possibilities and they can all happen in the blink of an eye. The best person to take care of yourself is you. Save your money.


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## marina628 (Dec 14, 2010)

My rule is to have at least 3 months expenses sitting in cash ,any stocks I have in my TFSA or non registered account can be cashed out and sold within 2-4 days .


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## slacker (Mar 8, 2010)

This topic seem to pop up now and again.

It's really not that complicated.

An completely liquid cash emergency fund that is accessible within the hour is a good thing to have. No one will disagree here.

How big of an emergency fund? The bigger the better. As big as you can afford.

How much will this emergency fund cost you? The opportunity cost will be the return of your next best investment (or mortgage payment).


These parameters differ from people to people. Some can only afford an emergency fund that can handle small emergencies. Some do not feel the need to be prepared for an emergency.

Some can only sleep at night with $50k literally lying under the mattress that they were sleeping on. Some are ok to have it in a HISA that is only accessible in 1-2 days.

Just pick a point on safety vs cost that you are comfortable with. No need to argue.


PS: My strategy. Small emergency can be handled with cash in wallet and around the house. I always keep a $20 in the car for emergency gas money. I have actually use this once, when i forgot to bring my wallet, and I ran out of gas 50km from my house. For medium size emergency, ATM and credit card cash advance is a good balance for speed vs availability. For bigger emergencies, I have access to about 6 months' cash of non-discretionary expenses within 2-3 days. I had a family medical emergency that required about 12 months worth of expenses in 2012, within a few day's notice. I was glad that the money was there, and considered the cost of keeping that emergency fund worth it. But like I said, everyone has different tolerance for risk, and cost.


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## Xoron (Jun 22, 2010)

the-royal-mail said:


> Even if you dump every penny of your cash into your mortgage, the mortgage -- and the monthly payments, will still be there.


That's not exactly correct. If you have a smaller mortgage remaining, you can ask the monthly payments to be reduced to stretch your mortgage back out to the original amortization. 

Lets say if your mortgage is $200,000 and your payments are 1,100/month with a 25 year amortization. If you make a lump sum payment of 100k, your payments will remain the same, and your number of payments will be shortened by x months. Banks (at least I know for sure with TD) will allow you to reduce your monthly payment of $1100 to something that brings the payments back out to the original term of 25 years. So you can reduce your monthly mortgage payment.

I'm not necessarily recommending this, just saying it is possible (and we did do it when we had a kid and decided that my wife would stay home while they are young)


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## jamesbe (May 8, 2010)

Hmmmm, lots to think about.

The other thing I do not like is the large mortgage balance, another psychological thing I guess. 2 years ago my Mortgage was $250k Then I moved... brought it up to $350k. It would be nice to see it at what it was 2 years ago. If I take $35k and drop it in, it will be at $299... closer at least.


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## brad (May 22, 2009)

There really are two ways to think about these things: from a strict bottom line perspective and from a psychological perspective. Or you can take a blended approach. The psychological power of motivation shouldn't be underestimated. For example, a lot of personal finance "experts" criticize Dave Ramsey's "debt snowball" approach because the people who use it would pay more in interest than if they tackle the highest-interest debts first. But that doesn't account for the motivational power of seeing progress, and in fact it's quite likely that many people will actually save more by using the snowball method because they end up being motivated by their progress and they throw more money at reducing their debt than they might otherwise. In fact I remember seeing a study somewhere showing exactly that result.

Personal financial decisions are made in the context of the entire ecosystem of your financial world. What may make bottom-line sense in isolation may not make sense in the context of your larger picture and your own personal psychological tendencies, level of discipline, and other factors. I think a blended approach of bottom-line analysis and psychological considerations is likely to work best.


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## Guigz (Oct 28, 2010)

In my opinion, 60K + 5K + 10K + RRSP+ TFSA = way too much of an emergency fund.

I realize that every person has a different safety treshold, but I have my particular way of looking at it.

We keep a reazonably sized emergency fund (say 3-6 months living expenses, 10-20K) and then we use the rest in the most efficient way possible.

The marginal utility of more emergency money is severely limited past a certain point. What sort of situation would happen that you would need exactly 60K$ (and not a whole bunch more) to get out of trouble? If the situation is really bad, 60K$ will not be nearly enough....

There are two types of emergency situations, small-medium unplanned expenses/living changes and major paradigm shifts.

In my opinion, it is not efficient to try to plan for the major paradigm shifting events as these have very small probability of happening and very high costs to cover them.

Over 15 years, keeping that extra 60K will cost you about 10K$ in "extra mortgage interests" (assuming 1% spread). Are you comfortable with this?


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## hboy43 (May 10, 2009)

the-royal-mail said:


> Don't be swayed by rhetoric.


Like your postings on the topic? Man, you are like a broken record. Whatever misery that befell you was I am sure quite unfortunate, but others take the position that building wealth rapidly when young and carefree makes more sense than leaving $50,000 sitting around doing nothing. If one rationally examines the probabilities, a different conclusion than yours is more than reasonable for many, many people.

hboy43


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## jamesbe (May 8, 2010)

I've decided to wait a few months to build up the emergency a little more and then I'm going to drop some into my mortgage to drop it below the majical 300k barrier.

Perhaps not the best decision financially but with the extra low rates it gives me a warm fuzzy for now with a safety net as well.


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## Rusty O'Toole (Feb 1, 2012)

I've never had an emergency fund, beyond a few hundred or maybe $2000 in the bank to cover current bills. What do you need it for? In case of an emergency I have credit cards I can use, plus a line of credit I can call on. If I need quick cash I can sell some investments and have the money in a day or 2. For a real disaster, I have insurance. So why would anyone need thousands, or tens of thousands in cash sitting idle? I'm 62 years old, have experienced a few disasters, but never needed to lay my hands on that kind of money overnight.


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