An emergency fund is a sum of money you put aside in case of a financial emergency such as illness or job loss.
Most financial experts recommend that individuals or families have access to between three and six months of expenses kept in a cash-equivalent account.
The idea is that you keep this money risk-free in the event that there's an unexpected loss of income or a large expense that comes up.
Where should I put my emergency fund?
You should store your emergency fund in any account that doesn’t carry any risk. Two options are:
- A savings account
Wealthsimple has Save or Joint Save accounts for individuals or multiple people. It currently pays 0.5% interest and is a risk-free way to store your emergency fund while also earning a little interest. A savings account is good for an emergency fund because you can access your funds immediately.
- Invest in a high interest savings ETF
If you have already contributed funds to a registered account like a TFSA, want to avoid any losses, and don’t want to move your funds into a savings account, you might consider moving your funds to a high-interest savings ETF instead.
A high-interest savings ETF is a type of investment that purchases savings accounts across Canada. Unlike guaranteed investment certificates (GICs), there is no minimum holding period and you make a withdrawal at any time.
Why shouldn’t I invest my emergency fund in something like the Conservative portfolio that has lower risk?
You never know when you might need to make a withdrawal from your emergency fund. It might be in a couple of years, or it could be tomorrow.
When you are invested in the market, returns are most volatile in the short term and tend to become less dramatic over time.
If you had to make a withdrawal from your emergency fund in the very short term (e.g. 12 months), you can expect a wide range of potential outcomes in your account at that time. This is true no matter which portfolio you are in - even the Conservative portfolio.
The goal of an emergency fund is to reduce the possibility that you need to make a withdrawal during a market downturn and have less than what you planned for.