Where Should (and Shouldn’t) You Keep Your Emergency Fund?

Wondering where and how to set money aside for emergencies? Here are some tips!

emergency fund
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Life is full of surprises. Unfortunately, those surprises are often costly.

Anyone who experienced the last year-and-a-half of lost jobs, COVID-induced market dips, and decade high inflation rates knows having an emergency fund isn’t just a suggestion. It’s a necessity.

While how much you ultimately set aside for emergencies is important, where you put that money is just as important. Let’s break down where Canadians should (and shouldn’t) stash their emergency cash.

The basics

First off, let’s establish what an emergency fund is. An emergency fund is an account of easily accessible savings that you use only for emergencies, such as losing your job, incurring a medical bill, or covering major damage to your home or car.

For our purposes, the keyword there is easily accessible. You don’t want this money wrapped up in investments or illiquid accounts, such as segregated funds or Guaranteed Investment Certificates (GIC). If you have an emergency, you want to be able to withdraw this cash in an instant.

At the same time, you don’t want to stuff this money under a mattress. You still want to take advantage of compound growth, even if the rate of return is lower than traditional investments.

On that note, let’s look at some accounts that allow you to withdraw money quickly, while also helping it grow.

1. High-interest savings account

A high-interest savings account (HISA) is probably the best place to keep your emergency fund. Though interest rates often change, some of the best HISAs range from 1% to 3%.

As you’re looking around for an HISA, pay close attention to the fees on the account. Check to see if your HISA has any annual or transfer fees. The best HISAs will offer no fees, no minimum deposits, and unlimited withdrawals.

That last one is important. Some HISAs restrict how much money you can withdraw a month. That pretty much defeats the purpose of an emergency fund. At the very least, make sure your HISA has unlimited withdrawals or a withdrawal limit that is larger than your emergency fund.

2. Savings account

The most plain-vanilla of our options, savings accounts, offer low interest rates, but easy access to money. You can open savings accounts at nearly every bank and financial institution in Canada. Unlike some HISAs, you don’t have to worry about paying fees or withdrawal limits.

3. TFSAs

Tax-Free Savings Accounts (TFSAs) are government-sponsored accounts that allow your contributions to grow tax-free. You contribute after-tax dollars (money you’ve already paid taxes on), and any earnings won’t be subject capital gains taxes.

Many TFSA providers allow you to open a HISA inside of your TFSA, giving you the best of both worlds, both tax-free earnings and high interest yield. Keep in mind: TFSAs have annual contribution limits (exceeding the limit will result in a penalty).

Where NOT to put an emergency fund

Basically, any account that limits your access to money is a bad emergency fund. Culprits include investments, segregated funds, and GICs. Again, with an emergency fund, you’re not trying to earn money. You’re trying to set aside a lump sum that will help you cover emergency expenses, which prevents you from depending on high-interest debt or dipping into your retirement accounts.

Got your emergency fund covered? Put your extra money here …

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool writer Steven Porrello has no position in any stocks mentioned.

More on Personal Finance

Female hand holding piggy bank. Save money and financial investment
Personal Finance

Here’s Why a Big Emergency Fund Is a Terrible, Terrible Idea

Here's why saving more than six months' worth of expenses can be disadvantageous to your household.

Read more »

cup of cappuccino with a sad face
Personal Finance

5 Super-Simple Ways to Completely Ruin Your Credit Score

Building your credit score takes time, dedication, and smart decisions. Tearing your credit score apart — well, you could do…

Read more »

Young woman sat at laptop by a window
Personal Finance

5 High-Paying Side Hustles That Could Help You Save for Retirement in 2022

If you're struggling to save for retirement, here are five side gigs that could give your retirement fund a boost.

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Personal Finance

The Tax Deadline Is Almost Here! Here Are 5 Things You Need to Know if You Haven’t Filed Yet

The deadline to file your taxes is May 2. If you haven't started yet, here's what you should know.

Read more »

consider the options
Personal Finance

New to Investing? Be Sure You Avoid These 5 Newbie Mistakes

If you're new to investing, here are five big mistakes you should watch out for.

Read more »

Couple relaxing on a beach in front of a sunset
Personal Finance

Lazy Canadians: Here’s How You Can Make $200 Per Week in Passive Income

To earn $200 a week, invest money in high-quality stocks or ETFs.

Read more »

gas station, convenience store, gas pumps
Personal Finance

Costco vs. Canadian Tire: Which Rewards Card Will Save You More on Gas in 2022?

The CIBC Costco Mastercard earns 3% back at Costco Gas, and the Canadian Tire Mastercard earns 10 cents per litre.…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Personal Finance

Finally! Apply for a CIBC Costco Mastercard Now to Get a Welcome Bonus!

From now until December 31, 2022, CIBC will give you a welcome bonus on the new CIBC Costco Mastercard.

Read more »