When people reference their emergency fund, they're usually referring to a special long-term savings account that holds a sum of money only to be used in dire circumstances. While many personal finance professionals highly recommend that everyone have an emergency fund, options like HELOCs and other investments may be a viable choice as well.
While it's true that we all should plan for emergencies in some way, a savings account isn't the only avenue available. The best financial plan for you will depend on your risk tolerance, employment situation, and your ability to stick to a financial plan.
We want our readers to have all the information they need, so we've compiled information on emergency funds and plans of all kinds, plus listed some tips for how to grow these savings. Let's dig in.
Key Takeaways
- An emergency fund is usually a savings account with 3 - 6 months worth of expenses saved.
- Opening a low interest loan, like a HELOC, when your finances are stable could also be a life saving tool if an emergency happens.
- Other emergency fund alternatives include a balance transfer credit card or an unsecured line of credit.
- Having as many potential sources for money or credit as possible can help secure your financial future.
What is an emergency fund?
The term "emergency fund" refers to funds set aside in a savings account or elsewhere for you to use in case of emergency. These funds can help in unexpected situations like job loss, accidents or illness, natural disasters, etc.
It's generally recommended to have 3 - 6 months of your expenses saved as cash in an easy-to-access account. This way, you have some wiggle room if any large unforeseen expenses come up.
The pros and cons
As with most personal finance decisions, there are both pros and cons related to having and maintaining an emergency fund. Here are the highlights:
| Pros | Cons |
|---|---|
|
|
Do you need an emergency fund?
If you're smart with the money you would've been using for your emergency fund, you should have even more money available to you. This is because instead of letting it stagnate in a low (or no) interest bank account, you've been investing it or paying off major debts (like your mortgage).
Here's why you may not need an emergency fund:
- Bad use of money: The money needs to be accessible, so it usually has to sit in a bank account somewhere earning negligible and taxable interest. Putting that money towards paying down debt or investments could get you much further ahead.
- There are viable alternatives: If you're in a stable financial position, applying for low interest loans (like a HELOC, unsecured line of credit, or low interest credit card) can provide a good cushion for emergencies.
But of course, not everyone's situation is the same. Here's why you may need an emergency fund:
- You're not financially stable yet: If you're at all anxious about the idea, already experiencing financial stress, or have credit issues, you may be better suited to go the traditional emergency fund route.
- You're in an abusive situation: Having a savings account in your own name provides the crucial financial independence needed for gaining control and building a safer future.
If you relate to either of these situations, try reading the federal government's guide: "Setting up an emergency fund." You may find the advice listed here helpful and feel more comfortable with your plan.
3 risks of not having an emergency fund
There's slightly more risk with this approach than having a true blue emergency fund, but it's still minimal. Here are a few things to be aware of:
| Situation | Details |
|---|---|
| Your loans could be called at any time | * If your credit rating becomes very poor, the bank may get worried and demand immediate repayment * If your lender goes bankrupt, they may need to call in the loan * These situations happen very infrequently, but is still a risk |
| Your credit score could fall rapidly | * Losing your income can lead to maxing your credit lines * This affects your ability to get new loans or financial products with good interest rates * This is why it's a good idea to take out credit lines and credit cards before you actually need the money |
| Your investments could tank | * Taking any kind of risk with funds you need for emergencies can be a bad idea * Financial crises can hit the stock market at any time |
Some of these risks are very unlikely to happen. If all of your loans are suddenly being called, your investments have gone nearly to 0, and you have no other means of accessing emergency money, it probably means that the economy has failed and your money is now worthless anyway. In this case, we all have bigger problems to worry about.
7 alternatives to an emergency fund
While planning for emergency expenses is important, there is more than one way to prepare – liquidating investments, withdrawing from RRSPs, and having a HELOC are viable alternatives to the traditional savings account approach.
However, most of the following suggestions on their own are not enough to completely replace an emergency fund, simply because they aren’t foolproof like cash in a bank account.
Combining a few of these backup plans can essentially replace an emergency fund if you’re willing to accept a very small amount of extra risk.
1. Home Equity Line Of Credit (HELOC)
A HELOC is an extremely low interest loan that's tied to the equity you have in your house. Just be aware that if you can't make your monthly payments, the bank may repossess your home.
The amount you can borrow from the bank using this line of credit increases as you pay off your mortgage in a predictable way. You can then access those funds at any time for a very reasonable rate.
For instance, while we owned our first house, we had a HELOC with Royal Bank that had a 3% interest rate for almost the entire duration of the mortgage until we sold the house.
The interest rate is always variable and is tied to the prime rate. For us, it was exactly the prime rate which held at 3% for a long time. As interest rates rise, this rate would also rise – but it's still guaranteed to be some of the cheapest money you can get your hands on.
2. Unsecured line of credit
An unsecured line of credit is very similar to a HELOC except there's no collateral (i.e. your house) to back it up.
The interest rate for these loans depends highly on your credit rating, but it's still likely to be relatively inexpensive when compared to something like credit card interest rates – just not as good as a HELOC's rates.
3. Low interest balance transfer credit cards
There are many credit cards out there that offer low interest rates on balance transfers you make within the first few months you have the card. Rates can be as low as 0% + a small cash advance fee, which is usually 1% - 3% tacked on to whatever amount you choose to borrow.
Be sure to set a calendar reminder to pay off your balance transfer before the promotional period ends. Otherwise, you may be left with interest rates that skyrocket to 20% or more. By that time hopefully your emergency has subsided and you’ve been able to pay back the loan.
The MBNA True Line® Mastercard® will give you 0% for 12 months – that's an entire year without worrying about interest.
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- It'll take you to the bank's secure site.
- You'll get the chance to read the offer and product details.
- If you choose to apply, filling the form should take between 10 to 15 minutes.
This offer is not available for residents of Quebec.
4. Skip payments on your mortgage
Many banks will let you skip 1 or 2 payments on your mortgage without penalty and for any reason – as long as you notify them of the skipped payments.
In fact, if you’ve been paying down your mortgage instead of building a savings account for emergencies, you'll find that many mortgage lenders will let you skip as many additional payments as you want without penalty as long as you're ahead of schedule on your mortgage.
Here are some scenarios that can quickly put you far ahead of the standard payment schedule and that may make you eligible to skip mortgage payments for several years:
- Doubled your monthly payments
- Increased your payments every year by 10% or 20%
- Made significant lump sum payments towards your mortgage
Be sure to check with your individual lender for their terms.
5. Liquidate your investments
Taking money out of these retirement accounts (RRSPs, TFSAs, etc.) is often considered taboo, but unless the account is locked in, which most aren’t, then there's no penalty for making withdrawals.
Though it's true you'll have to pay taxes on the money you withdraw from an RRSP, you're eventually going to have to do it anyway, even in retirement.
This table offers a bit more information on your options in this area:
| Option | Details |
|---|---|
| Selling investments | * Choose the investments that have done well, selling these first |
| TFSA withdrawals | * No tax implications * You can redeposit funds the following year without penalty |
| RRSP withdrawals | * If you lose your job, your income will be lower that year, so you won't be in the highest tax bracket
– so RRSP withdrawals aren't so bad * Be aware that you can't regain the contribution room |
6. Use your credit card to buy time
Some of the above options may take some time to pull off, so try taking advantage of the grace periods offered by your credit card. This way, you'll have access to funds while you decide which solution is best for your emergency.
However, it's very unwise to carry a balance on your credit card. The interest rates are extremely high and you could get caught in a debt spiral, so make sure you have a plan for paying off your credit card before that happens.
7. Sell your stuff
Canadians tend to have many "things" around that may have some value but aren't household necessities. Now is the time to sort through all that stuff and choose a few high-value items to list for sale. Facebook Marketplace and Kijiji are great marketplaces for selling household items, or you could hold a yard sale.
Building your emergency fund
If you're dedicated to building an emergency fund, we have a few tips that can help, such as starting small and automating your savings. Keep these ideas in mind as you begin and continue to save:
- Start small: Even if you can only manage $10 per week, do it. Raise this amount as you're able over time.
- Round up your purchases: Some apps (including bank apps) allow you to round up your purchases to the nearest dollar and send that extra money into savings.
- Cut costs where possible: Even just skipping one coffee per week or stretching your salon appointments to every 10 weeks instead of 8 can give you a few extra coins to stash away.
- Automate your savings: Try treating your savings like any monthly bill and automatically transfer it into your savings each payday. This way, you have less opportunity to spend it.
- Maximize interest: Using a high interest savings account will help your money grow, no matter the amount.
- Save any windfalls: Tax refunds, annual bonuses from work, financial gifts, and all other unexpected gains can be set aside to grow your fund without impacting your budget.
Do you have an emergency fund?
If so, would you consider getting rid of it by using alternate means to access funds in an emergency?
Let us know in the comments below.
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Do I need an emergency fund?
For most middle class Canadians, it may not be necessary. Emergency funds usually sit virtually stagnant in a low interest savings account – you're better off putting that extra money towards paying off your debts and making profitable investments.
How much do I need in my emergency fund?
The standard rule of thumb is to have 3 - 6 months expenses saved up in your emergency fund. That way, if you lose your job or are unable to work, you'll have that amount of time covered.
Should I invest my emergency fund?
Investing the money set aside for your emergency fund could secure you better returns on that money – that way it isn't sitting in a bank account being useless. The downside is if the Canadian economy crashes and you lose your job, the investments may have lost value. In that case, you have 6 other alternatives at your disposal.
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