Creating a GIC money mill in my Emergency Fund

12 Comments

I’ve developed a somewhat bizarre, somewhat creative, I think effective savings strategy for my Emergency Fund.

When I finally managed to find a summer MBA internship, the full-time income let me catch up on my finances. Combined with income from freelance writing and this blog, I started to inch ever closer to the income I enjoyed before returning to school to pursue my MBA. When the summer ended, my employer extended my contract for another month, and now as September closes, it’s been renewed again for October (I’ve asked not to continue past October though, so this gravy train is slowing down… but only so another one can get on its tracks, more on that later).

One of the first things I did with the extra cash was dump it into my TFSA, where I normally keep my emergency fund. Once the balanced tipped over $5,000 (my goal for this year), I started to wonder what the heck I was doing keeping that much cash on hand.

I hate leaving the $5,000 in cash of my emergency fund just sitting there earning 1.3% interest BUT I don’t want to invest money I might need to access immediately. I wondered:

Is there a better place to save this money that leaves it accessible while earning a higher interest rate?

Sure is, kids. There sure is. I masterly contrived a bizarre and elaborate strategy I submitted to Mikhaila for approval (always good to have best friends that are also personal finance nerds) before implementing on September 1. Here’s what I’m doing:

1. Maintaining a “float” of $2,000 of cash in a tax-free savings account

2. Staggering a series of $1,000 3-year term GICs to mature quarterly beginning in 2017.

Why GICs? GIC stands for Guaranteed Investment Certificate which is an investment vehicle that traditionally pays higher interest than a savings account, but only if you don’t withdraw the money before the end of the term. The terms vary — anywhere from months to years — and the interest rates very with the term, with higher interests typically being offered for longer terms.

Tangerine offers some of the best interest rates on GICs available. You can sign up for an account using my Orange Key 33863113S1 and receive a $50 referral bonus. 

The GIC I bought pays an interest rate of 1.9%, which over its 3 year term, pays more interest than the same amount of money would earn in a savings account:

Screen Shot 2014-09-27 at 10.27.24 AM

comparison of how much interest $1,000 will earn in a 1.9% GIC vs. a 1.3% savings account over a period of 3 years

I plan to purchase my next $1,000 3-year GIC on December 1st, and then another on March 1, 2015, and so on every 3 months for 2 years. The first one will mature on September 1, 2017 and the rest will come to term on a quarterly schedule after that for the following two years.

What’s the point of this nonsense?

Well, first of all, 32 year old me will probably not be vehemently opposed to getting $1,000 + interest deposited into her TFSA every quarter.

I already have more than 3/4’s of my financial assets invested in stocks and ETFs, which means I’m not locking up any significant portion of my savings. If you’re trying to aggressively grow wealth, I would not recommend GICs, but if you already have a good chunk of change working hard for you in the stock market, a super secure investment might be just the balance you’re looking for.

Breaking a GIC and forfeiting the interest is just painful enough to deter someone like me who loves to raid her TFSA for this, that, and whatever. Money in GICs is less accessible, which means I can’t borrow from myself to cover an expense or a splurge then pay it back later. The money is locked up, and it’s gotta stay there!

The 3-year term is short enough that if interest rates do go up (they’ll go up someday right?), I’ll be investing regularly enough to catch it. If interest rates drop even further, I’ll have caught rates where they are now with some of my funds, ensuring a higher return than what the rest of my money is earning.

The $2,000 cash float in the savings account is a decent amount for quick fixes: a plane ticket to Salt Lake City to see my parents, a replacement phone if I smash mine or lose it, or almost 2 months of essential expenses (as you know, I contribute $1,250 per month to the joint chequing account I share with my boyfriend to cover my half of our shared expenses).

If I need more than $2,000 to cover an emergency, I can break one of the GICs. Because the GICs will be split in $1,000 increments, I can opt to break one (or two, as needed) of the GICs. This is a better option than had I dumped all my funds into a single GIC — if I only need $700 it’s a real shame to break a $5,000+ GIC for it!

*Note: When you break a GIC, you get back your money but you lose the higher interest rate. Sometimes you get zero interest, or you get interest at an even lower rate than a typical savings account.

Interested in trying this yourself? You only need to save $83 per week. 

Simply transfer $83 every Friday to a savings account and let it build up. Every 3 months, use the money (which has been earning interest too!) to buy a GIC. 

It will take two full years of quarterly investing to tie $8,000 up in $1,000 GICs — which means the first one will mature only 12 months after I put the last one away. I bought the first one at an interest rate of 1.9%, which means it will pay out $58 in interest at its maturity, but Tangerine updates your interest every day so you can see its current value anytime you log on:

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snapshot from September 26th

The Result In Tabular Form

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click to embiggen

The best perk of this strategy? I can change my mind! Because I’m buying GICs every 3 months, I can stop anytime and switch gears.

Lastly, the money doesn’t have to be for emergencies. I like to think that 3 years from now, I’ll be riding on 3 more years of improving my finances and I’ll need $1,000 (or $8,000) even less than I do now, but you never know. In any case, I’ll be able to keep the money as emergency savings OR use it towards…

If there’s anything I’ve learned from being a personal finance blogger, it’s that there will be no shortage of things I want to do with my money.

If you looked closely at the table, you may have noticed this savings strategy will save me nearly $750 above my $10,000 EF goal. This number could change depending how interest rates change over the next 2 years, but in any case it looks like I’m over-saving. If I’m adamant of sticking as close to $10,000 as possibly, I can simply opt to only deposit $320 in my last GIC.

$9,000 + $320 = $10,000 

No, really. Here’s how:

Screen Shot 2014-09-26 at 3.24.24 PM

I don’t think I will buy a $320 GIC, but I might opt for two $700 GICs in March and June 2015. After my convoluted internship hunt, I know finding a job after graduation might take some time, so I might want to tone down aggressive savings plans at this time:

Screen Shot 2014-09-26 at 3.43.04 PM

Having some flexibility in any plan makes it easier to stick to, and saving strategies are no different.

Thoughts on my bizarre EF money mill strategy? How do you maximize the interest you earn on liquid cash? What are your emergency fund goals?


12 Comments

  1. taylorqlee

    Tips to all the American readers out there: you can basically do the same thing with certificates of deposits. The technique is called a “CD ladder”.

    Unfortunately interest rates are so low in the US there’s really not much point to doing it, but if your credit union is particularly generous on interest rates, might as well give it a shot.

    • Bridget (Author)

      I’m always shocked by the difference in interest rates between Canada and the US… so many of your banks are <1% it's crazy. Ours our bad here but I'd be infuriated to earn even less.

  2. Dayle

    I enjoyed reading this post! Love all your charts and examples 🙂
    I should think about doing something like this… my emergency fund is also sitting in a TFSA earning a measley 1.3%.
    I assume you are buying GICs within the TFSA so the money isn’t coming out and back in when you purchase them?
    I am planning on selling my house next year, and I was going to put the majority of that money into a 3 year GIC because I don’t expect to use it until bf’s mortgage is up for renewal in 3 years, at which time we can see where we’re at, and maybe use the money to pay of his mortgage or buy a new house together. So many things to consider!
    So far the only thing I’ve been able to do to maximize the return on my e-fund money is more it around between PC and Tangerine to try and take advantage when they have interest rate promotions. I recently learned PC does two snapshots, one of your registered and one of your non-registered accounts. Since I had the contribution room available I withdrew my emergency fund completely from my Tangerine TFSA and deposited it into a new PC TFSA I opened. I should be able to earn 3.1% on the entire amount until mid December. We shall see!

    • Bridget (Author)

      All in TFSA GICs to maximize gains! Haha it would be a real shame if I was withdrawing the funds and then using up contribution room to deposit them in a TFSA later.

      Tangerine recently offered 3% until December on deposits made between Sep 1 and Sep 30. It always showed up when I checked the balances of my GICs, so I’m hoping this promotional rate applies to the GIC but we’ll see.

  3. Jessica

    The difference between 1.9% and 1.3% on a $1000 portion of your emergency fund is only $6/year. Plus you lose the “liquid” nature of your emergency fund, because its tied up. This plan only makes sense if you have no emergencies within the next 3 years, and emergencies don’t usually care when your GIC matures. I’d keep it in a high interest savings account, the difference in interest doesn’t make it worth it.

    • Bridget (Author)

      I was thinking the same thing initially, but by keeping the $2,000 cash float + maintaining a gap between my income and expenses that let’s me afford “surprise” expenses, I’m hoping it won’t matter.

      This is essentially a non-issue until next year too. I’ve only invested $1,000 of my $5,000 EF — which means there’s still $4,000 sitting in my savings account. I’ve never had a $4,000 emergency before so I’m hoping one isn’t right around the corner to decimate those funds, but they’re certainly there if I need it — and hopefully enough of a buffer that I don’t have to break the GIC I just bought, which still has 35 months left to go.
      In the meantime, I’m continuing to add to my savings account on a monthly basis, which means the amount of liquid cash I have is increasing up until I buy the next GIC in December, at which point I’ll have $2,000 locked in GICs but still ~$3,500 liquid in the savings account.

  4. I’ve thought about putting my emergency fund into CDs, but the interest rate difference just never seemed worth it. The whole point of the emergency fund is liquidity to me.

  5. So, wow. I just popped onto my bank’s rate page to check out CD rates (American reader here) and it’s only 60-month CDs that have a rate higher than my savings account. And the rest of the terms have a rate that is lower than my savings!!

    Yet another reason to move to Canada…

  6. I’ve contemplated doing this at some point in the future, but I’m not there yet. Currently I’m just playing Tangerine and PCF interest rates off each other to get a higher rate. My work has a 3% GIC (all lengths, which is silly in itself) and I’d take them up on it if that rate is still around when I am debt-free.

  7. Dayle

    Hopefully – I’d be curious to know if it applies to the GIC.
    Because of the snapshot they do before the promotion I wouldn’t have been eligible for the promotional rate on very much of my savings because it was mostly already in Tangerine. I had to move it all over to PC to get the maximum interest.

    So if it’s already in a TFSA, you can just transfer it into a TFSA GIC (kinda like an “in kind” transfer) without it affecting your contribution room? Sweet! I need to do this!

    • Bridget (Author)

      Yep! And you can select the interest to be reinvested in the GIC or be paid out to your TFSA savings account so it doesn’t eat up any contribution room either.

      It’s not much, but every bit counts right? haha

  8. Koala

    Lots of people do a GIC ladder. Some do so on an annual basis than a 3 month one, but I don’t think it’s bizarre.