Building your Financial
Success
With Alain Aube
Planning for financial success
In case of
emergency be sure
Things are tight, but you're getting along—making your mortgage
payments, handling all those monthly bills, even setting aside a bit of
money as an investment in your future. Then it happens: A sudden,
serious illness; a big money house repair; or another unexpected
financial hit. Could you survive? Do you have enough savings to see you
through?
Sure, you can always take out a loan or tap into your Registered
Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF).
But, borrowing money means paying interest and adding to your financial
strain with extra monthly payments. And taking emergency money out of
your retirement plan is likely the last thing you want to do, because
your tax bill will increase and the tax-sheltered growth of your
retirement plan will be severely diminished.
There is an alternative. Set up an emergency cash fund now, before an
emergency arises. Most financial experts suggest that an emergency fund
should contain the equivalent of about three months' net income. But, if
the future of your job is certain or seasonal, if you have extra
financial commitments, or if you spend more than average, your emergency
fund should be larger—perhaps as much as five or six months' net income
or more.
Maybe you'll never have to use your emergency cash reserve—and that's
good news. Invest it wisely and you'll earn additional income for your
retirement or for making another dream come true. The trick is to pick
appropriate investments — and for an emergency fund that means choosing
investments that will protect your capital and allow you to withdraw
funds quickly at little or no cost to you.
Easily redeemable interest-generating investments that are low risk are
usually your best choice. But, you may wish to consider alternatives
instead of traditional bank accounts that pay little or no interest,
such as these:
Money market mutual funds are a great place to park your emergency cash.
They're stable, usually deliver reasonable returns relative to savings
accounts, and your money is readily available should you need it.
Money market mutual funds usually provide better returns than bank
accounts because they invest in secure, short-term, government and
high-quality corporate securities. Many of these funds offer chequing
privileges plus the option of redeeming fund units and receiving your
money in just a few days. Unlike savings accounts, however, they are not
covered by CDIC (Canada Deposit Insurance Corporation) or other
insurance protection.
Cashable term deposits or Guaranteed Investment Certificates (GICs) are
available from many financial institutions. They earn competitive
interest rates and usually can be cashed without penalty.
Canada Savings Bonds are offered once a year by the federal government.
Some provincial governments (or their agencies and crown corporations)
also offer savings bonds. These securities are government-backed, making
them a very secure investment, but because they're available only for a
limited period, you'll have to plan your purchase. Federal government
savings bonds pay competitive interest and can be cashed on any business
day, although you may lose that month's interest. Provincial savings
bonds may have similar features.
Term bank accounts are useful if you want to keep your money in a
savings institution, but your ability to withdraw your money on short
notice may be limited or, alternatively, you may pay a penalty such as
forfeiting some or all of the accrued interest. They often pay better
rates of interest than 'tiered' savings or chequing accounts and the
higher your balance, the more interest your money will often earn.
It's a good idea to set aside funds for unexpected financial
emergencies. And, it's an equally good idea to get help from a financial
advisor so you'll have a better grasp about how much you should keep in
your emergency fund, as well as the mix of investments that is just
right for you. Your financial advisor can recommend investments that
don't lock your money in or involve a financial penalty for early
withdrawal, but that also deliver solid returns to help secure your
financial future.
