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A reader emailed us the other day asking “Can you write about emergency funds?”
Us: “Emergency funds? What’s there to say about that, other than to have one?”
“No, I mean, what do we do with them? Do we put them in a CD, or a GIC, or a checking account?”
Us: “What are you talking about? Just HISA-Hop!”
…confused silence.
And that’s when we had one of those lightbulb moments. HISA-Hopping is something we started doing nearly 10 years ago, and because of the time that had passed we had just kind of assumed that it was just common knowledge and everyone already knew about it. Turns out, not so much. Whoops.
So to reiterate, the bulk of one’s net worth should ideally be in some kind of long-term investment, like a low-cost Index-hugging ETF like the one we build in this very Workshop. But we also advocate keeping a cash cushion to deal with short-term day-to-day expenses, like food, shelter, and booze. You know, the necessities of life.
These funds, naturally, must be kept at liquid as possible (for easy conversion to booze). It’s meant to buffer day-to-day and emergency expenses, so it makes no sense to keep it in a vehicle with a term limit, like Certificates of Deposit (CDs) or Guaranteed Investment Certificates (GICs). You want to keep these funds as cash, or at least as close to cash as possible.
So what’s a soon-to-be-FI’er to do? Simple.
HISA-Hop.
HISA stands for High Interest Savings Account. And Hop stands for…well, hopping.
Here’s how it works.
Most major banks offer shittily low interest rates on savings accounts. As of the time of this writing, the Canadian bank CIBC is offering 0.65% and Bank of America is offering a pointless 0.03%. 0.03%?!? I could make more money digging for change out of my couch!
The reason for this is that those big banks have branches everywhere. Maintaining that army of ATMs and branch tellers isn’t free, and those costs dig into the interest rate those banks can offer you.
That’s why online-only banks and smaller credit unions can offer a higher interest rate. They don’t have to maintain ATMs all over the country, or pay bank tellers to stand behind a counter. That lowers their operating costs, and as a result, they can pass those savings onto you.
But at the same time, that army of ATMs and branch tellers DOES come in handy. Who wants a bank account that they can’t easily get cash out of? Emergency funds are named that way because they’re supposed to be able to respond to emergencies! If I’m sitting down to a pancake breakfast and my maple syrup runs out, I need a solution RIGHT THE HELL NOW. I can’t afford to wait 3-5 business days for THAT bullshit.
So basically, we have a classic tradeoff. On one side, we have yield. How much does the account pay you? But on the other hand, we have convenience. Can I get my money out whenever I want?
And as always, we take one look at an either-or tradeoff situation like this and we call BULLSHIT. You can have both. And the answer is HISA-Hopping.
Basically, you open up a checking account with one of the big national banks. The ones that have ATMs at every corner. They will, naturally, pay you almost nothing, and often try to charge you ridiculous bank fees for keeping your money with them. However, depending on the account type, there will often be an account type where if you keep a certain balance level the fees all go away.
This is important.
Bank fees, as we’ve written about in a previous article, do nothing to improve your happiness. So you want to eliminate them completely from your life. So here’s what you do.
You keep the minimum balance level on your convenient checking account to avoid any banks fees. Anything about that level, however, you ship off to a HISA.
And again, HISAs are often smaller institutions like credit unions or online-only banks. So it’s extremely important to make sure that the bank in question if insured by CDIC (Canada) or FDIC (USA). These are government regulatory bodies that insure your account balance in the case of institutional failure.
That means that as long as the institution is CDIC or FDIC insured, your risk level is basically zero. Any savings you put into this institution is guaranteed by the federal government. So you want most of your money sitting in the highest-yielding government-insured bank you can find.
Which finally brings us to HISA-hopping.
May of these banks will occasionally offer bonus interest rates for parking your money with them. They’re often a percentage point (or more) higher than their competitors, and the idea behind that is to get you to move all your money to them during the promotional period, and then hopefully you’ll forget to move it out when the promo period is up. That’s what normal people do, right?
But we’re not normal people, are we? We’re Revolutionaries. So HISA-hoppers like ourselves keep watching out for promo interest rates and just shift our emergency fund from online bank to online bank, taking advantage of the higher interest rates while shouldering precisely zero extra risk, since the institution is backed by the federal government.
And at each HISA you open, you set up electronic transfers between your checking account and your HISA so you can easily move money in and out. This way, you get the best of both worlds. Convenient access to your money via the big banks, plus the higher yield of online-only banks and credit unions with the amount above the minimum deposit thresholds.
The HISAs we use right now as Canadians are PC Financial, Tangerine, and EQ Bank.
Aside: If you’re Canadian and thinking of opening a Tangerine account, please consider using this link with our Orange Key 34753654S1. You’ll get $50 if you do.
To our American friends, you might want to check out your local credit union or online savings account. Current rates in the USA seem be hovering around 2%
So that’s HISA-Hopping! Do any of you HISA-hop? If so, which banks do you use?
We won’t be doing a buy this week, as our bi-weekly buys have drifted a bit from our normal 1st-and-15th buy schedules. We will resume our regularly scheduled buys next week.
Continue onto the next article!
WORKSHOP TOOLS
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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.
Boy, did I ever get really excited about the “many of which are paying 3-4%” link! …then I realized it hadn’t been updated since like 2014. Best I can find (granted, a cursory search) suggests 1.3% or so if you don’t care to muck about with five debit transactions and one direct deposit every billing cycle. That’s insufficient ammo for me to convince my wife that the $40k+ in her 0.75% savings account might better serve us elsewhere. Maybe a different tack is in order…
Whoops you’re right, that was an old article. Link has been updated.
Current online savings accounts are an anemic 1.15%, which is really surprising considering the Fed funds rate is at 1.25%. Hopefully your savings accounts will start floating upwards soon…
Alterna Bank is (was recently?) offering 2%. We switched to there after Tangerine’s rate dropped. If you haven’t discovered RateHub.ca yet, I highly suggest worth a perusal…
Right now you can earn 2.4% plus get $50 free with Tangerine!
1) Open both a Tangerine Chequing and Savings account to earn 2.4% for 6 months:
https://www.tangerine.ca/en/landing-page/switch/index09.html
2) Make sure your initial deposit is at least $100 and use Orange Key 16418138S1 during the sign up process to get $50 free!
That’s all there is to it!
New Tangerine clients now earn 3% on savings accounts for half a year!
https://www.tangerine.ca/en/index.html
For $50 Sign-Up Bonus: Use Orange Key 16418138S1 during the sign-up process AND make an initial deposit of at least $100 and you’ll get a $50 sign-up bonus!
Good idea!
You should post your Tangerine key so you can benefit from people who want to get an account. They pay bonuses for bringing in new clients, and we all want these workshops (and you) to keep rolling.
Unrelated question: do you ever worry about the environmental toll of flying? I do.
Good idea. Link has been added.
As for the environmental toll of flying, not really. We may take a few more flights a year (maybe 5-6), but it’s offset by the fact that we don’t commute to work every day.
Yeesh, I’ve got to say that’s way more effort than it’s worth in my books, largely because you shouldn’t have a lot of money sitting around in a HISA in the first place, so the negligible gain in interest from these promotional periods is largely worthless.
Maybe I’m lazy, but opening and closing HISA’s every month and juggling God knows how many accounts just isn’t worth the effort for 1% interest on, what should be, a small amount of money.
I’ve never been a big fan of having a huge emergency fund sitting around earning pennies. Put it in your portfolio then withdraw it if need be, or better yet if you’re responsible your credit card or HELOC is a perfectly good emergency fund that isn’t costing you money, unlike having months of expenses sat in HISA’s earning practically nothing.
How many people even use an emergency fund? In 5 years of savings and investing I’ve never touched my portfolio for any emergency.
I’m all for credit card hacking, which has a relatively similar amount of effort involved, as this actually has worthwhile benefits. This just seems OTT.
That’s a good point Vancouver brit. Switching accounts every months for those promotional rates seems a hassle. But if you use credit cards as emergency funds you would have to pay those nasty interest rates, how can one avoid those ? Plus withdraw from the portfolio might changes things for some people. Like if I have most of money in RRSP, I would have to pay taxes on those.
I feel emergency funds are necessary but I think I shouldn’t have as much of emergency fund that I have to be concern about the interest rate on those. It may be different story for Americans where emergency funds are used for Health care.
Simple, your investments should be in mostly TFSA’s, which are withdrawable with no tax penalties. For a couple this is up to $102,000 currently, plenty for any emergency fund.
Use your TFSA for investments, open a HELOC or credit card for emergencies. If you have an emergency that is SO time sensitive it can’t wait for you to withdraw from your TFSA, use your credit card/HELOC. Then withdraw from your TFSA to pay off the credit line before any interest is due on it.
As an example, leaving $50,000 sat in a HISA earning 1.5%, rather than invested in your portfolio earning 7.5%, is costing you $40,000 over a 10 year period. Waste. Of. Money (And time, in this case)
I really enjoyed reading your comments and what you are saying makes A LOT of sense. I am in the states and our Roth IRA is equivalent to your TFSA, we are only allowed max contribution of $6,000 a year and only allowed to take out your contribution. You mention which was in 2017, that as a couple you can withdrawal $102K? So my question is, where do you recommend putting the rest of the “emergency fund” for that year so that you can easily withdrawal and it tax-free, if needed? Thanks!
You haven’t needed to touch your emergency fund in 5 years because (1) your luck is holding up and (2) there hasn’t been a significant stock market correction during this time period.
I think “luck” is subjective. We’ve built a life where there are basically no emergencies I can think of that would result in us needing an emergency fund. For example:
1. We live a frugal life where one of us could lose a job without us needing to touch any emergency fund
2. We rent, so there can be no large unexpected home ownership costs
3. We have great insurance on anything of value, such as our vehicles, our personal property, our pet, our health, our life. There is no emergency I can think of that wouldn’t be covered by insurance.
4. My job specifically will not be affected by a market crash. I work in a very stable industry in a very stable role (accounting). The likelihood of us both losing our job at once is very, very slim.
5. We have no debt. None.
I don’t think there is much luck about it, we’ve just created a life where there is very little chance of an emergency in regards to finances. It’s pretty nice knowing there isn’t much that can put us in “emergency mode”.
As for the market correction, that won’t affect our day to day lives unless we both lose our job, which is highly unlikely given our roles.
I just had this convo with my SO yesterday. I argued for the emerg. fund, she argued against. She said basically anything less than 5k would just go on the CC and be paid with the next paycheck. Maybe I need to re-evaluate my stance because we’re in the exact same boat as you VanBrit (stable jobs, renting, insurance, no debt, living in Vancity).
A small emergency fund is fine if it makes you feel better, but you should know the whole time you hold it you’re throwing money away. For someone like you and I, our risk level is very, very low, so there is no need to have a huge emergency fund as the chance of an emergency is minimal.
We tend to keep a somewhat high cash balance ($10,000 in the bank at all times), just because some months our expenses fluctuate, so that balance changes from anywhere between $7,000 and $13,000. Any minor emergency (~$5k) could be covered with this cash easily, and anything more we have a $10,000 credit limit. I don’t see any reason to keep more of an emergency fund than that in our situation, so we invest the rest (which we can always withdraw in a serious emergency that I can’t think of)
It’s simple working capital management, and any good business pays close attention to this. The goal is to reduce working capital to the lowest possible level, whilst remaining liquid enough to operate and investing the rest to earn a profit. Most (good) businesses don’t keep high cash balances (which a HISA is), they invest it in something and maintain a large LOC if need be for emergencies. This way they have the benefit of being ready for an emergency, AND earning a good profit on their cash. Some companies hold savings accounts, but that’s mostly for dipping into and out of for operations, not for emergencies. In that regard, a HISA would be good for something like saving for a vacation, but not an emergency fund, which is a long-term holding.
I like to think of it this way. Every dollar you have in an emergency fund would be worth double in 10 years if you invested it instead. Holding $10k in emergency? That’s costing you $10k. $20k emergency fund? $20k wasted. Based on this I’ve likely earned a few thousand dollars already just by not holding a high emergency fund.
It’s less opening and closing accounts, and more just moving money between multiple HISAs. I use Tangerine, EQBank and Manulife currently and I’d say a couple time a year they offer a 2.5-4% rate for new deposits. I just cycle that money to the account that’s offering the highest rate at that time with an e-transfer. They’ll usually send an email promoting their new rate so you don’t need to be checking rates often. Really, it’s quite easy.
Great post! I’ve never heard of HISA-Hopping. I currently use a credit union (NFCU) and get a decent interest rate, but nothing like you’ve linked to here. In retirement I’m currently planning to put my emergency fund/buffer in a Vanguard Money Market account for a 1% yield. I’ll look into the other options for the USA.
I have opened accounts in the past just to get promo rates, but only in cash – most notably $500 from BECU for opening an account using GoCurryCracker’s promo code and then making more by having my partner sign up with mine. Mwahaha.
Also the person who doesn’t really drink is saying alcohol is a necessity *eyebrow raise*? Are you channeling me and Wanderer? Converting my money is booze is a key priority for me ;).
“Also the person who doesn’t really drink is saying alcohol is a necessity *eyebrow raise*? Are you channeling me and Wanderer?”
This post was written by Wanderer, to my knowledge all of the investment workshops are. It says at the top of the page who wrote each article.
You’re so right! I didn’t even look and just assumed. Thank you. I need more caffeine.
You can also do a ladder of CDs with different maturity dates. A simple example would be if you had six months worth of expenses in emergency savings. You should not need to pull out more than one month of expenses out at a time (i.e. if you lost your job and had to pay the bills, for other or larger emergencies just use your credit card– by the time it is due at least two months worth of CDs will have become available).
So you could just buy six CDs each maturing one month after the previous one. As each one of them matures if you don’t need the money just buy another six month CD and keep the cycle going.
I’m not seeing CDs with interest rates much higher than a savings account. Ally is offering 1.15% on a savings account and 1.25% on a 1-year CD. Not worth the hassle…
Once we retire in 2y10m, I plan to keep 4% of my stash (1-3 yrs of expenses) as “cash-equivalent” and 20% (5-8 yrs) in a bond index ETF. That way we can weather pretty much any type of market corrections.
Your article led me to notice that EQ Bank is currently offering 2.3% That’s not horrible compared to the 2.66% dividend we get from the bond ETF fund (although the latter is taxed at a lower level).
Which bond ETF pays their interest as dividend? My understanding is that it’ll be taxed the same.
My bad! They all look the same on the web page but, you’re right, the tax receipt will certainly be different.
Great Article. I have been wondering what to do with my emergency fund sitting in my Cap1 MM earning a measly 1.1%. While, I think HISA hopping is cool, but it’s too much hassle, but thanks for getting up and going on searching for better options for hard earn savings. I found this bank with decent options and saving rates.
https://www.bankoncit.com/term-cd/
It’s for Americans, but I wonder if it’s available for the rest of the world as well. There’s a bonus of 100 cash if you open an account with 15,000 balance.
Might not be possible in Canada, but here in the states, I’ve been pushing 5% interest savings accounts as often as I can. I’ve written articles about them in the past.
If you open up all of them that you can, that’s $25,000 per person earning 5% guaranteed interest in an FDIC insured savings account. A household can put away $50,000 earning 5% guaranteed interest per year. Takes a little bit of work to setup, but once done, it runs itself. A lot of people won’t do it though because they either think it’s too complicated (which I disagree, but whatever), they think there’s some catch (there isn’t), or they think it’s not worth it (it is.).
To our American friends, you might want to check out your local credit union, many of which are paying 3-4%.
———-
Fake news. ?
Haha, to be fair though, you can get 5% interest. Not fake news. Seriously.
Links?
He’s referring to this: http://www.financialpanther.co/insight-card-5-percent-interest-savings/
Haven’t tried it myself (obviously), but it’s an interesting read.
Yeah, whoops, sorry. That was an old article. Link has been updated.
I’m sitting w/ all my emergency savings (2 yrs worth in expenses because I can be fired soon) all in BoFa Savings account paying 0.01%/yr. What alternative do I have with same security as that given that I’m not US citizen therefore small banks won’t let me open a HISA (already tried). Thought about bonds but those do not protect the principal…stocks much less…CDs maybe but it’s not much better…any alternatives?
Don’t forget, either you 1. have a pretty small sum sitting around for a HISA deposit (which is your recommendation in general) or 2. you’ve got a whack of money for a HISA deposit on which any interest earned is taxable at the highest rate. So what does it really buy you after taxes at the end of the day?
Been HISA-Hopping for close to 20 years with Tangerine! I’m always shocked that everyone doesn’t do it!
Just a heads up. You can negotiate your interest rate with tangerine. I have an account with them and their higher interest promo I was in with them was ending so I thought I’ll call them up and ask them what rate will they give me. I told the PC was offering a higher rate and I was looking at moving my money.., guess what? They gave me 2.4% for 6 months… not to shabby!
Offtopic but you should seriously consider doing an article on slippage. I made the mistake of setting a generous limited order because I was in a hurry and couldn’t remain in front of the computer for a series of buys. My broker was happy to overpay by ~2% per share on a particularly large purchase when the purchase went through (at a time the price actually FELL) and I haven’t quite recovered yet.
Right now you can earn 2.4% plus get $50 free with Tangerine!
1) Open both a Tangerine Chequing and Savings account to earn 2.4% for 6 months:
https://www.tangerine.ca/en/landing-page/switch/index09.html
2) Make sure your initial deposit is at least $100 and use Orange Key 16418138S1 during the sign up process to get $50 free!
New Tangerine clients can now earn 3% on a savings account for half a year!
https://www.tangerine.ca/en/index.html
Get a $50 Sign-Up Bonus: Use Orange Key 16418138S1 during the sign up process AND make an initial deposit of at least $100 and you’ll get a $50 sign-up bonus:
https://www.tangerine.ca/en/referafriend/index.html
For Australians, another option is using an offset account. You aren’t earning interest but are offsetting the balance of your mortgage by the amount in the account to reduce the interest you are paying. We have found this to be a great place to keep our emergency fund.