How much should you save in your Emergency Fund?
Some may say 3 months’ salary, others may say 6, but they all say the same thing: you need an emergency fund in your savings account. But if you ask me, the whole concept of an Emergency Fund is a genius scam fueled by financial institutions.
Let’s say the average person makes $50,000 annually. This means your emergency fund should be up to $25,000. You leave your emergency fund in your savings account, making so little interest you’re practically losing money once you factor in inflation.
Meanwhile, this financial institution is lending out your $25,000 at 19.99% interest to another poor consumer who they’ve convinced to take on more credit card debt than they can manage. And in return, all you’re getting is a measly 0.1% … 0.8% if you’re lucky.
In other words, the reason why I don’t believe in Emergency Funds is because Savings Accounts pay so little interest. If you have access to low-cost borrowing that you could easily access in the event of an emergency such as a Home Equity Line of Credit, it would be in your best interest to invest your Emergency Fund money instead.
If an emergency never arises, you’re in the best possible position, and even if an emergency does arise, you’re still in a much better position than you would have been if you had saved the cash in a savings account.
CIBC’s Bonus Savings Account currently boasts a rate of 0.10% annually… if your balance is over $3,000. That’s 0.0083% per month.
Now let’s take a look at their sister company, PC Financial, known for their low fees and high interest. Their Interest Plus Savings Account has an interest rate of 0.8%. That’s 0.067% per month.
So let’s say Mr. A puts $12.500 in his CIBC savings account and $12,500 in his PC Savings account. After one month, his emergency fund of $25,000 will have grown to $25,009.38.
So after an entire year of going by the book and sitting on his $25,000 emergency fund, he’s now made $112.87 in interest, for a grand total of $25,112.87.
Now let’s meet Mrs. Z. Assume that instead of saving the $25,000 like Mr. A, she invested it in the CIBC Global Monthly Income Fund, which posted a moderate return of 5.4% last year. After one year at 5.4%, she now has $26,383.92, having made $1,383.92 in interest, a difference of $1,271.05.
Let’s also assume she owns a home, which qualifies her for a Home Equity Line of Credit, with a low interest rate of 3.2%.
Now, at the beginning of Year 2, both Mr. A and Mrs. Z find themselves in a bit of a sticky situation and now owe $25,000.
Mr. A cashes out his savings account, leaving him with a total of $112.87. He transfers it to his higher savings account at PC, and at the end of Year 2, he now has $113.78.
Mrs. Z, on the other hand, leaves her Mutual Funds untouched, and instead borrows the $25,000 from her Home Equity Line of Credit (HELOC) at a rate of 3.2%.
So, at the end of the year, even though she now owes $27,240.70, her mutual fund is now worth $27,844.45. Even after she cashes it out to pay off her HELOC balance, she still has $603.75, $489.97 more than Mr. A.
What do you think? Do you keep an Emergency Fund? If so, how much do you keep in it?
(Disclaimer: If you don’t have access to a HELOC or another source of easy access, low-cost borrowing, I would suggest you create an Emergency Fund with as low of a buffer as you’re comfortable with, then invest the rest.)