Before worrying about investing in stocks, exchange-traded funds (ETFs), or other assets, I think every Canadian should prioritize building an emergency fund.
The conventional recommendation is to keep three to six months of essential living expenses readily available. That provides a financial cushion if you lose your job, face an unexpected medical expense, need urgent car repairs, etc.
An emergency fund has three priorities. First is liquidity, meaning you can access the money quickly without jumping through hoops. Second is capital preservation, so you don’t have to worry about selling investments at a loss when an emergency occurs. Third is earning some nominal interest to help offset inflation while the money sits idle.
Unfortunately, the average chequing account does a poor job of satisfying that last requirement. And depending on how your bank structures its fees, it can actually cost you money to keep your emergency savings there.
Source: Getty Images
Why I wouldn’t keep emergency savings in a chequing account
Canada’s Big Six banks have traditionally offered very little interest on ordinary chequing account balances. Many accounts pay nothing at all, meaning your money gradually loses purchasing power to inflation.
There’s a straightforward business reason for this. Banks use customer deposits as a source of funding for lending and other activities. The difference between what they earn on interest-bearing assets and what they pay to fund them contributes to their net interest income.
From the bank’s perspective, a large pool of customer deposits earning little or no interest can be an attractive source of funding. From the customer’s perspective, however, leaving thousands of dollars sitting idle means giving up interest that could be earned elsewhere.
Then there are monthly account fees. Many traditional chequing accounts charge a monthly fee unless you maintain a specified minimum balance. For example, some accounts require you to keep at least $4,000 in the account throughout the month to qualify for a fee waiver.
That creates an awkward situation for emergency savings. Suppose you’ve accumulated $5,000 and suddenly need $2,000 for an urgent repair. You withdraw the money, bringing your balance below the required minimum, and could lose your monthly fee waiver.
In other words, accessing the emergency savings for their intended purpose can trigger an additional banking expense. I think that’s a poor arrangement, especially when there are alternatives without the same minimum-balance requirements.
Better alternatives for your emergency fund
My preference would be a high-interest savings account (HISA) that pays a competitive rate, allows withdrawals without penalties, and doesn’t require a large minimum balance.
Fintech platforms have become increasingly competitive here. For example, Wealthsimple offers a cash account with interest rates reaching 2.5%, depending on eligibility and account benefits.
That might not sound particularly exciting compared with stock market returns, but remember that an emergency fund isn’t supposed to maximize growth. Its job is to remain accessible and preserve your principal while earning something in the meantime.
If you prefer a more traditional banking relationship, online-only banks are another option. EQ Bank offers 2.75% interest on its Everyday Banking personal and joint accounts when qualifying conditions are met.
Unlike a conventional chequing account paying virtually no interest, these alternatives allow your emergency savings to generate a modest return while remaining accessible for unexpected expenses.
It’s also worth checking deposit insurance coverage, transfer limits, withdrawal availability, and whether the advertised interest rate depends on direct deposits or other conditions. Savings rates are variable, so today’s rate isn’t guaranteed indefinitely.
Personally, I’d still keep enough cash in my everyday chequing account to cover upcoming bills and routine transactions. But for an emergency fund, I see little reason to accept virtually no interest or risk monthly fees just to keep everything at the same bank.
