Creating a GIC money mill in my Emergency Fund

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 32251507S1 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:

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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:

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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:

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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?

Not Just Another Emergency Fund Post

Let me start this out by saying, I hate emergency funds. Not because they aren’t useful, but because they are boring as hell. They are the savings equivalent of paying for insurance. And no one wants to save for insurance.

Because I hate emergency funds (and because I’m in debt), I’ve never kept much cash around.

Why would I? I’m in a two income household, I’m a renter, I have car insurance AND a crazy big warranty, I don’t have pets or kids, and I don’t have any existing medical problems. Well, guess what? We all have our thing that could put us in danger of shelling out four figures or more for an emergency. My thing is my husband’s family living overseas.

In January, my mother-in-law died unexpectedly, causing us to buy overseas plane tickets and take three weeks off of work. The problem was, I had basically nothing savings-wise. Know what that means? The plane tickets and all travel expenses went on a credit card (as did some of our life expenses due to the lack of work). Our expenses were crazy high, because grief just isn’t frugal.

While I don’t regret ANY of the spending (because people, THEN money), it has opened my eyes to the importance of an adequate emergency fund.

You may have just about everything going for you, but emergencies don’t give a shit about your plans.

Prepare yourself now, no matter how unlikely you believe it is for an emergency to occur.

Guess what, guys? Dealing with the loss of a loved one is not the time to worry about money. While you can’t insure yourself against heartache and loss, you can have the money in place so you can grieve without finances weighing down on you.

Lessons learned:

1) When shit hits the fan, you best have an umbrella.

2) Don’t ever let something as trivial as money keep you from your loved ones. EVER. You wouldn’t trade your loved ones for cash, don’t prioritize it over them.

3) While I hate putting money in an emergency fund, I need to do so. Paying debt is more attractive, but what’s the point if I’m going to have to finance emergencies anyways?

We all have that thing that could ruin us financially without an emergency fund. What’s yours? Do you have enough in your emergency fund to accommodate it?

Stop being jealous, start getting results: the $10,000 Emergency Fund

One of my favorite personal finance bloggers and BFFs offline is Mikhaila from A Fistful O’ Dollars. I really adore Mikhaila because she is smart, into fashion and frequently responds to my text messages with hilarious GIFs. But one of the things I admire most about Mikhaila is that she’s saved up a…

$10,000 Emergency Fund.

So awesome! Needless to say, I’m a tad jealous of that awesome financial security. I wish I had a $10,000 emergency fund! That about would be about 6 months of essential living expenses for me, and just seeing such a big beautiful round number of dollars would give me a daily dose of happiness and security. Alas, how was I ever going to accumulate that much in my Emergency Fund? I struggle to keep it at $3,000! I guess I’ll just be jealous of Mikhaila forever.

….or I could just figure out a plan and start working on a $10,000 Emergency Fund myself.

Because it’s not as hard as it looks at first glance. With some rough calculations I figured I could get my EF up to $5,000 by the end of this year, which means I’d only have another $5,000 to go. If I set my timeline to have a $10,000 Emergency Fund by 29 and contribute $250/mo, I’ll be right one schedule — I mean, assuming no emergencies make me withdraw some or all of the funds.

See? It’s not even challenging, it’s just a matter of setting up automatic transfers from my chequing to my savings account. The downside is I’ll have to wait 1.5 years to see the final result, but for a five-figure sum that’s not too bad. Like most financial goals, the number itself is intimidating the but the path to get there is pretty straightforward. I think I’m lucky that after so many years of blogging about money, an 18 month financial commitment to put $250/mo away is relatively easy. The hardest part is always building the habit in the first place, but once you’re used to giving up part of your income for paying down debt or saving for retirement, it’s just something you know how to do so you feel confident taking on something else.

This would provide me with 6 months of essential living expenses and probably solidify my eternal friendship with Mikhaila because few things say “I am a PF master” the way a $10,000 EF does.

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Have you decided to take on a big financial goal? What’s your plan, man?

I’m so glad I have an Emergency Fund!

I’ve always been a huge advocate of setting aside money “just in case”. I think an emergency fund is essential to financial health, in the long-term but especially in the short-term. I’ve worked hard to build mine up to a healthy $2,500 this year, and up until this point have only dipped into it once for $65 dentist appointment.

If you can believe it, I actually thought I would get away with having a substantial balance in my TFSA without incident forevermore, but alas, scheduling conflicts have forced me to dip into savings just to tide me over until payday.

If you remember, I moved into my  new apartment last Saturday. Because I moved before the end of the month, I erroneously assumed my damage deposit + first month’s rent would be due on August 1st. Well, this isn’t the case. My resident manager has asked for my damage deposit this week (I paid it yesterday) and first month’s rent by this Saturday. In cash.

Ever heard that a credit card is NOT an emergency fund? This is a great example why.

To tide me over, I withdrew $1,000 from my emergency fund this week to cover the cash expense of my damage deposit + first month’s rent. Imagine I didn’t have that money immediately accessible in a savings account — a $1,000 cash advance on a credit card is not a pretty sight. I’m pretty sure the interest on cash advances on my credit card is something stupid like 20% or 25%, whereas the cost of withdrawing it from savings is 0%.

THANK YOU, Emergency Fund!

I can’t tell you how nice it was to tell my new resident manager, “no problem” when he asked for $1,200 cash this week. Having the money set aside prevented what would have otherwise been a serious headache, which may or may not have included awkward requests at work for cash advances before payday. Thankfully no has to know I was totally broke this week… except, of course, all of you who I am now telling this story to on a very public blog.

My plan is to replenish the missing $1,000 from my EF this Friday when I get paid, and the rest on August 1 when my old roommate returns my damage deposit for my last apartment. Crisis averted, Bridget’s butt = saved.

Build your emergency fund, kids. You will need it.

I dipped into my Emergency Fund!

Yikes! I have been building the EF up for nearly a year and it’s gone totally untouched up until this point. The last time I made a withdrawal was September 2010 to pay the damage deposit on the apartment I currently live in. That time it was $600 — this time, thankfully, it was only $64.

Were you worried I had wiped it out entirely? No need for that yet; knock on wood!

I had made a dentist appointment when I was in France (they called me when I was on the train between Nice & Paris!) for when I got home, then totally forgot about it. When it came up last week, I hadn’t budgeted at all but went anyway because hey, it’s the dentist. You need to keep up with that stuff. After a cleaning, fluoride treatment, X-rays and check-up, my bill came to a whopping $317! Thankfully, I’m still covered by the University’s graduate student health plan (until August!) so I only had to pay $64.

Lesson: the right health plan is worth it. Always opt in.

I love the student health plan. It’s probably saved me $2000+ since it was implemented two or three years ago. It makes my birth control cost $5 instead of $40. It makes my glasses and contact lenses cost $50 instead of $200. And it makes my dental bills cost $64 instead of $317. Seriously, it is good stuff.

Anyway, even though the amount was small, I’m still glad I had the money available since I’m on a credit card diet post-France. I’m a huge advocate of an Emergency Fund — even more for the times I’ve had to use it, and that hasn’t been often. It’s currently at $2500 (ok, $2436 until next payday!) and while I definitely want more in there, I feel like that’s a really solid start. It’s definitely enough for an unexpected medical expense or a plane ticket if there was a family emergency, and it’s more than enough for small things that I fall short on like dental bills or groceries. Because I just got back from a month-long trip and am only working part-time, I’m scared of coming up short on rent or food money, but knowing I have cash set aside “just in case” takes a lot of the pressure off.

It also makes me feel really guilty for buying a sweater and a tank top for $63 the same week. Whoops!