Should I invest my emergency fund?

For this week’s Reality Cheque, we’re looking at what you should do if you haven’t used your emergency fund.

I have had an emergency fund for more than a decade or two. I’ve pulled small amounts out here and there for between-paycheque emergencies, and I instantly put it back. I’ve turned on—then off, then back on again—automatic deposits until I reached an amount I felt pretty good about. But it just sat there in a regular ol’ savings account, earning a small amount of interest. 

As a personal finance journalist, I have wondered about doing something more with that cash, maybe putting it into a registered investment account. After having an emergency fund for over a decade, I finally needed it, and I’m so glad I kept it accessible. More on that later, but first… 

What’s the purpose of an emergency fund?

Blame FOMO, #FinTok or that know-it-all guy at the dog park: there always seems to be a better option than saving for what may or may not happen one day. But you have to think of structuring your money with different purposes, which is what advisors call a financial plan.

One way is to think of your accounts as employees. Registered accounts, for example, are akin to sales people and the accounting department—they help increase money coming in and lower income tax going out. But an emergency fund is like administrative support; its role isn’t to improve the bottom line, exactly, but it is needed for a company to do well.

Hervin Pesa, a certified financial planner with Aware Financial in Calgary, says: “Somebody that hasn’t seen—excuse my language—sh!t hit the fan before, they really undervalue emergency funds.” 

Think of the opportunity cost

Pesa suggests you consider the opportunity cost of the rainy day fund—what’s the benefit you could lose without it? It’s not always financial. It can be peace of mind, knowing the money is there. Or the future less-stressed you, having access to that cash instead of having to deal with the long processes and even penalties of withdrawing from investment accounts or locked-in deposits. 

Think of it as insurance

Don’t think of the money as lost, but as more of an insurance premium. “That’s what you’re ‘buying,’ not necessarily the 8% to 10% return, or whatever the FIRE-breathing enthusiasts say their money was doing in the stock market.” (FIRE stands for financial independence, retire early.) 

For one client who asked about her emergency fund and how it could be better used, he calculated what the growth could be investing in the stock market (which isn’t guaranteed). Then he asked if she’d be willing to pay that amount to sleep better at night. She thought about it and said yes.

Lianne Hannaway, a chartered professional accountant and wealth coach in Toronto, echoes the insurance analogy with clients. “I always advise them to see an emergency fund not as an investment, but as insurance. If your year is accident-free, you don’t say, ‘Well, I wasted money on my car insurance.’” So don’t needlessly put growth pressure on your emergency fund.

Think of it as a security bridge

Consider your emergency savings as a “security bridge,” says Hannaway. That means using your liquid cash as a way to protect your overall worth. Say the markets drop, affecting the value of your investments. “You’re still getting that bit of extra interest on your savings account,” she says. You’re “bridging” your income by diversifying how you hold your money. 

Where to put an emergency fund

An emergency fund needs to be accessible—but only when you need it. And this takes not only thoughtful decision-making but restraint too. 

Hannaway suggests giving each account a purpose, like investing, vacation savings, or whatever your goals are. Include an emergency fund, too, as one of those important purposes. 

“You still want to prioritize your goals, allocating your money in the right places to achieve your goals.” She points to high-interest savings accounts, suggesting that you shop around for a good interest rate and look beyond the promotional rate. (Read How many bank accounts do you need?)

How much do you need to save for a rainy day

How much you put away depends on your savings goals and, to an extent, your risk tolerance. Do you want enough to pay for three months of missed work income? Do you want to be able to cover expenses for a year? You’ll have to break down the math and your timeline. 

One key is to automate your savings. If you are regularly putting money away in a savings account, then you are among the majority of Canadians. Here’s how often we’re saving to cover an unexpected expense, according to Canada’s Financial Well-Being Survey.

• 47% of Canadians report putting money into savings often or very often.
• 29% say they do it now and then.
• 24% say they seldom or never save. 

Don’t plan for an emergency, but prepare for one

As for my emergency, it wasn’t due to a layoff, accident, or anything like that. It was a paperwork issue. My mortgage company stopped paying my property taxes and buried this news deep in a 30-page annual mortgage statement three years ago. Then city hall for some reason sent the missed payment statements to the wrong address. Or so I was told, as neither of us have proof of that. Conveniently for the mortgage company and the city, they say it’s my responsibility to quality control their work when they screw up (and hide it from me). If it wasn’t for my emergency fund, the city could have sold my house! Thankfully I had access to the money (not locked up in laddered deposits), and could pay it off immediately.

Imagine if I hadn’t.