# investing emergency fund



## digitalatlas (Jun 6, 2015)

so i know there are a lot of very active members that are staunch advocates for keeping emergency money in cash, probably under a mattress somewhere in the house, but some have also suggested keeping a line of credit for emergencies instead of tying up all that cash. i understand the argument that nothing beats cash, and that is true. 

recently i read in an old issue of moneysense (handy dandy free subscription since rogers is discontinuing their rewards program and i had to spend the points somewhere or else i'd lose them anyway) about actual research that suggests keeping emergency funds in cash results in overall less portfolio growth over a lifetime, and that makes total sense. you pay for the lower growth with the stability of keeping cash.

i've come to think that perhaps keeping all that cash is not the best way to do things for me. we're relatively young with no debts, huge HELOC and unregistered LOC (no balances), excellent access to credit but equally excellent discipline. there's about 12k in cash for emergencies in savings accounts right now, and i feel like perhaps it can be invested somewhere, even if it's a relatively stable bond ETF, or some dividend ETF that pays 3% or something. yah, those fluctuate more than cash, but it's making all of less than 1% right now and we're actually losing money.

what has been your experience with this decision? i expect the-royal-mail to be pro-cash. what does everyone else tend to do, and why?

thanks


----------



## NorthernRaven (Aug 4, 2010)

Unless "emergency" is defined as < 5 business days, the baseline for return on emergency cash is 1.75% (multiple Manitoba CUs everyday rate, as well as a couple CDIC options). And if willing to do a little account chasing, up to 2.5%-3% for the last year or so (Zag, EQ, Tangerine promos, etc). That takes a bit more of the curse off if one is worried about returns. I suspect the YTM yields on "relatively stable bond funds" won't look that great these days. Putting it in that or a dividend fund means accepting the risk of crystalizing losses if one's emergency happens during a market downturn. 

The LOC/HELOC things could provide an alternative, but would accrue interest until the emergency investments were eventually sold, eating into returns. And part of the emergency might be that the bank revokes or calls the credit line... 

Unless the potential growth on a small amount of cash is somehow a significant part of one's investment projections, having it as cash is probably a cheap bit of peace of mind.


----------



## brad (May 22, 2009)

You could consider a tiered approach: keep one month's worth of expenses in a high-interest savings account as your first line of defense against emergencies, and then if you want something beyond that you could invest (with the understanding that you could lose 40 percent or more of it if you have to withdraw at a time when the market is down...which in fact is often when people need to draw on their emergency fund if an economic downturn leads to a job loss).

The other thing to consider is to put your emergency fund into the context of other forms of insurance you may have. If you lose your job, you'll likely be eligible for EI, right? And if you develop a long-term illness maybe you'd be covered under your employer's long-term disability insurance (assuming you have an employer and assuming they provide coverage). It's worth thinking through the kinds of "emergencies" you want to cover with an emergency fund, and to think of your e-fund as supplemental to, rather than duplicative of, your existing forms of insurance.

There are lots of different rules of thumb about emergency funds, but I think it's an individual decision based on your individual circumstances.


----------



## hboy43 (May 10, 2009)

I don't explicitly have an emergency fund and never have had one. I subscribe to the school of thought that borrowings can do the job the 2 or 3 times a lifetime I might need 5 figure funds in a hurry. I have not killed the return on tens of thousands of dollars over 35 years and am richer for it.

Having said the above, we have 2 Canadian funds accounts at minimum $2000 each and $US account at minimum $5000 to avoid fees. These accounts can certainly be thought of as greater than $10,000 emergency funds.


----------



## brad (May 22, 2009)

hboy43 said:


> I don't explicitly have an emergency fund and never have had one. I subscribe to the school of thought that borrowings can do the job the 2 or 3 times a lifetime I might need 5 figure funds in a hurry. I have not killed the return on tens of thousands of dollars over 35 years and am richer for it.


It's a valid point, but much depends on the kind of "borrowings" you'd have to resort to. Emergency funds exist to give you quick access to cash so you don't have to go into debt and pay interest. If you're talking about using a HELOC the equation is different from, say, taking out a personal loan from your bank or racking up tens of thousands of dollars in credit card debt.

Emergency funds can be seen as a way to self-insure against low-probability, high-risk events (job loss, long-term illness or injury, etc.). But if you have other forms of insurance to cover those types of events you can focus the e-fund more on medium-probability things such as major home or auto repairs that aren't covered by your home or auto insurance.


----------



## Plugging Along (Jan 3, 2011)

This is really a personal assessment and risk assessment question. Everyone's situation is different. I will give my scenario and thought process with how my personal situation lead me to my choices.

First, what does one define as an emergency? I have had people say unexpected repairs, car breaking down, ect are on this area. I personally consider this little things, any thing that can unexpectedly breaks is already planned for, so I have that on my regular operating fund. I have an operation fund that covers all my month bills and any unexpected spendings in my regular bank account. I have about about one months operation expediturge on the generous side, plus the $5000 td requires for me to get my free banking. So essentially the $5k is my 'operating emergency fund'. 

What I consider a real emergency fund is if my spouse was to lose his job for a long period or time or both of us to both lose our jobs. This is a high probability for us, as we are in oil country, and my spouse is a consultant, so we have had to keep our emergency fund fairly high as we have used it probably 3 times 7 years. This for use serves as our larger expenditure fund. It holds the money for our next vehicle, plus family vacations, perhaps renovations, whatever may be larger than the regular things that break down. Because consulting has its ups and downs, especially for us in Calgary, we keep this strictly cash , High interest account. There is enough to buy a nice vehicle in there or equivalent to about 9 - 12 months of expenses, If things are going well, and we see the risk is low of using it, then we look at spending some for our major rents, vehicle replacements etc. if things looking riskier like now, we don't spend on anything not necessary. We keep a lot of cash on hand for these reasons. I may lose the returns on this amount, but I figure it's worth it. For my spouse and I to need to hit our emergency funds, we know things have to be really bad in the ecomony and selling our investments would be at a lost.

Just before the 2008 crash, we were debating about investing our emergency fund in the markets because they were great. We out a large chunk in, but I stopped the final bit only because I found out I would be going on mat leave, so left that portion in cash. Then my spouse was laid off, and I was facing the same potential, we were on a 1/5 of our normal income. If I would have had to pull out my money from the investments, I had lost almost 50% on the amount I had just invested. Instead, I was able to leave that money in to bounce back, and use my cash. I would have lost about $30k if my emergency fund was invested. So for me, cash was a pretty good investment. 

Everyone is different, so you have to see what your risk assessment is. I have concluded for me that things will most likely all be down if I have to use my emergency fund, so cash is important.


----------



## djkelly (Feb 18, 2016)

I use a multiple tier approach.

I've run a "worst case" monthly budget where all paycheques come as late in the month as possible and all expenses come as early as possible. This told me the minimum I'd need in my chequing account to cover all expenses for an "average" month (i.e. no big, out of the ordinary, expenses).
Before moving funds into an investment they usually stay in a HISA for a bit until the pool is large enough to make the appropriate buys. This account's size varies from dollars to $10k, but depending on availability it's the first line of emergency funds.
If I need a couple hundred or a couple thousand dollars to cover an out of the ordinary expense and the savings account happens to be low I use our children's savings account. (They have an RESP, but this account is one we set up where we deposit all birthday money, Canada Child Tax credits, etc. The idea is when they turn 18 they have a nest egg already building.) This is not their money yet and it's just in a HISA, so we're comfortable "borrowing" from it provided there is a plan to pay it back within a few months.
In the case of a larger emergency we would withdraw from our TFSA.
If the emergency was long lasting - like being unemployed for greater than a year - we would look to a HELOC.


----------



## bass player (Jan 27, 2016)

I keep a couple hundred bucks on hand, but that's it. My emergency fund is a credit card...if the furnace dies, I would simply use a credit card to pay for a new one and then pay the bill when it comes due. Since I never carry a balance it costs me nothing.


----------



## james4beach (Nov 15, 2012)

digitalatlas said:


> so i know there are a lot of very active members that are staunch advocates for keeping emergency money in cash, probably under a mattress somewhere in the house


I keep mine in bank accounts.

The amount of emergency cash you want to keep probably has a lot to do with your job stability. I don't have good job stability, so I keep a lot of cash around.


----------



## james4beach (Nov 15, 2012)

bass player said:


> I keep a couple hundred bucks on hand, but that's it. My emergency fund is a credit card


What happens when you lose your job? I think that people who rely on the CC as their emergency fund can get really hosed when they lose their job. Suddenly they're living off the CC and carrying a balance. At least get an unsecured LoC if you don't want to use cash.


----------



## cainvest (May 1, 2013)

james4beach said:


> What happens when you lose your job? I think that people who rely on the CC as their emergency fund can get really hosed when they lose their job.


I would think the grace period on any CC is enough time to cash in a few investments if one needed it.


----------



## bass player (Jan 27, 2016)

james4beach said:


> What happens when you lose your job? I think that people who rely on the CC as their emergency fund can get really hosed when they lose their job. Suddenly they're living off the CC and carrying a balance. At least get an unsecured LoC if you don't want to use cash.


I'm a month away from retirement...


----------



## My Own Advisor (Sep 24, 2012)

An emergency fund, for us, is all about risk management.

We see this as unexpected repairs or major failures around the house. Our goal is to have/keep $10k for that. I would also consider losing your job an emergency. 

I would eventually like to have a modest cash wedge of >$20k but it will take us some time to save that up and I have to think about the opportunity costs involved. 

I would not want to rely on a credit card as emergency fund. That would be horrible.


----------



## Ag Driver (Dec 13, 2012)

I work seasonally, so I must have large sums of money for my off season. I like to keep around 30k in cash and I consider this as spent money. 

I have separate accounts (much like the jar budget approach) for the following:
Mortgage (Mortgage, Home Insurance, Taxes)
Auto (Insurance, Large Maintenance Fee's, Auto Loan)
Benefits (Gym, Dental, Misc.)
House Improvements (Major or Minor Maintenance, Upgrades, etc)

I can operate about 1 year without any income before the tap runs dry. Then panic sets -- I then have my LOC (10k) and Retirement Savings (~23k) to attack next....in that order. I would never consider using a credit card as an emergency fund. With such high interest rates on credit cards, that is simply financial suicide.


----------



## ThinkingCapital (Feb 16, 2016)

Having an emergency fund prevents you from going into debt or taking out investments at a bad time (such as a down market) if there's an emergency. Generally, it's a good idea to have at least enough to fund a major expense (car breaking down, etc.) and it's preferable to have some saved for bigger situations such as a job loss. That said, it doesn't *have to* be in cash, as long as you have a plan and a way to access this money relatively quickly should something come up. Cash is just usually the easiest and safest option.


----------



## bass player (Jan 27, 2016)

My Own Advisor said:


> I would not want to rely on a credit card as emergency fund. That would be horrible.


It would be horrible if one HAD to rely on a credit card, but I don't. I keep a couple hundred cash on hand and that's it. If there is an emergency, I will simply use my credit card and then pay the bill by the due date.


----------



## cainvest (May 1, 2013)

bass player said:


> If there is an emergency, I will simply use my credit card and then pay the bill by the due date.


Exactly ... its just like using a CC any other time in your life, pay it off before you incur any interest charges.


----------



## digitalatlas (Jun 6, 2015)

Thanks for all the replies. 

I don't consider routine e maintenance on cars and the house part of emergency. I keep separate money for them. I think emergency fund is only stuff that I can't imagine, and beyond d insurance coverage. 

I have a HELOC that's not used for anything else, and I figure that could be an emergency fund. I'll probably reduce the emergency cash in hand by a little bit


----------



## AltaRed (Jun 8, 2009)

james4beach said:


> What happens when you lose your job? I think that people who rely on the CC as their emergency fund can get really hosed when they lose their job. Suddenly they're living off the CC and carrying a balance. At least get an unsecured LoC if you don't want to use cash.


I agree many comments here so far are mis-defining emergency fund. An emergency fund is for major crises, such as job loss for 3-6 months, a major family crisis such as a major uninsured health expenditure, etc. A HELOC can certainly be the stand-in for this purpose IF the emotions of dipping into debt can be managed together with the crisis at hand. Many people underestimate the mental stress this can cause. Those who are rather cavalier about not needing to have an emergency fund have likely never experienced an emergency crisis.

Thus the typical recommendation to have 3-6 months of cash stashed away in a HISA fund.


----------



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

If you mean the old advice of keeping enough money around in cash for 6 months or a year's expenses that went out with the Stanley Steamer and high button shoes.

I have never kept an emergency fund of any kind. If hit with an unplanned expense I have credit cards. For big unplanned emergencies I have insurance. Any stock market account can be drawn on within a few days.


----------



## investnoob (Jun 29, 2009)

bass player said:


> It would be horrible if one HAD to rely on a credit card, but I don't. I keep a couple hundred cash on hand and that's it. If there is an emergency, I will simply use my credit card and then pay the bill by the due date.


But you need funds on hand to pay off the card. Aren't those funds an emergency fund? You used a broken furnace as an example. Let's say that it cost 500 to repair or 2500 to replace and it was charged to a credit card. Where does the money come from, before interest is charged? If you have that much money on hand, then isn't it an emergency fund?


----------



## AltaRed (Jun 8, 2009)

A broken furnace is not an emergency. Those kind of expenses can be paid off on credit over time. I am talking about a 6 month job loss, or a $50k medical bill in the USA not covered off by insurance such as an excluded 'high risk' sporting or rescue incident. People mis-define what are true emergencies.


----------



## james4beach (Nov 15, 2012)

Curious what CMF members think of margin accounts as possible emergency use.

Because I hold GICs and government bonds in my brokerage account (which are substantially more marginable than stocks), I have 40K-60K margin available. So while the GICs aren't liquid and can't be cashed out in case of emergency, the broker would let me borrow heavily against them, up to 85% of their value. I can borrow 96% against gov bonds. There's very low risk of margin calls on these.

I could borrow 40K at 4.0%, withdraw margin from brokerage. Do you think this is a reasonable supplement to my cash emergency fund? I could keep less cash, and rely more on this margin account.


----------



## My Own Advisor (Sep 24, 2012)

I don't think margin accounts are a good idea for emergency funds.

I also wouldn't want to borrow @ 4%. I could/can get prime + 0.50% at my bank which is far less than 3%.

I feel emergency funds are very liquid and you do not go into debt for them. Maybe that's too strict but if you have to borrow money for an emergency it's called borrowing money for emergency.

I feel an emergency fund is important for any major financial need you didn't see coming: i.e., an emergency. You can plan ahead to replace a furnace, a roof, a bathroom, etc.


----------



## Oldroe (Sep 18, 2009)

I agree emergency is emergency.

You don't always get to plan roofs had a storm make it emergency and furnace, had one that could have been patched and replace later or do it now. I went the emergency route.


----------



## james4beach (Nov 15, 2012)

My Own Advisor said:


> I feel an emergency fund is important for any major financial need you didn't see coming: i.e., an emergency. You can plan ahead to replace a furnace, a roof, a bathroom, etc.


That's how I'm leaning right now too, and my emergency fund is all cash (in a savings account)


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> Curious what CMF members think of margin accounts as possible emergency use ...


I see it the same as slightly worse than using a HeLoc. This assumes the user understands what drives margin calls.




james4beach said:


> ... I could borrow 40K at 4.0%, withdraw margin from brokerage. Do you think this is a reasonable supplement to my cash emergency fund? I could keep less cash, and rely more on this margin account.


If you stick within limits ... though I though some brokers offered better than 4.0% so where it was GICs as the asset, I'd want to be sure the margin rate is as good as possible.


Cheers


----------

