Should I Keep My Emergency Fund in a GIC?
GICs are paying over 5% interest right now (as of November 2022) depending on the term you choose, which makes them a tempting place to stash some cash, especially when markets are so volatile.
I often get asked if keeping an emergency fund in a GIC is a good idea, given that they are paying more than double in some cases than a high interest savings account. My reply of course is no, it’s not a good idea.
What is an Emergency Fund?
An emergency fund is ideally enough savings to cover about 3 to 6 months' worth of expenses in case of job loss. In addition, it can be used to cover an unexpected but costly expense in order to avoid going into debt. This could be anything from replacing a furnace, a major vehicle repair, temporary time off work for a sickness or otherwise. The amount one sets aside for an emergency really depends on personal circumstances but some sort of emergency fund is definitely recommended.
In the case of all of the above emergency examples, you’ll note that the money would need to be accessed immediately. After all, your mortgage, rent or furnace repair can’t wait until your GIC matures.
What is a GIC?
Recall that a Guaranteed Investment Certificate or GIC requires you to lock your money away for a specific term with the promise of guaranteed interest paid out. This is considered a very low risk investment given the guarantee of both capital (your initial investment) and interest (money the financial institution promises to pay you at the end of the term). The small risk you take on is that you are agreeing to loan the money for a specific timeframe and won’t have access to that money until the end of the term.
Should you use a GIC to keep an Emergency Fund?
Given the rules around a GIC, it should be evident that locking away an emergency fund is not a good idea. Instead, a high interest savings account, where money can easily be transferred to a chequing account and withdrawn, is a better idea.
Online banks are especially great as they pay a higher rate of interest than traditional brick and mortar banks. For example, EQ Bank is paying 2.5% effective October 16, 2022. There are plenty of other great online banks as well.
One thing to note is that some online banks can take 4 - 5 business days for the money to be transferred to a chequing account so that you can withdraw it and therefore, it may even be advisable to keep a small portion of your emergency fund in your chequing account so that it’s readily available.
Final Word on GICs and Emergency Funds
GICs are an excellent place to hold cash for planned, short-term goals such as savings for a vacation, home renovation, vehicle purchase or even retirement income needed in the next year or two. As long as the date the cash is needed is after that GIC matures, this is a good place to protect capital while earning interest.
Emergency funds on the other hand need to be easily and quickly accessible at all times and therefore you could consider using a combination of a high interest savings account and a chequing account. The ultimate goal of having an emergency fund is to avoid debt. Earning interest on this money should be secondary.
Having a clear understanding of the purpose of your savings should help you make the right investing decision. Whenever you aren’t sure, a financial advisor is your best bet. Frank offers free virtual meetings or phone calls to answer any of your money questions.