Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
Why You Should Never Invest Your Emergency Fund
Guest Post | Dec 20, 2022
Credit: Austin Distel via Unsplash
It’s a tough time for people who like to save. Thanks to a 40-year-high inflation rate, the money sitting in your emergency fund is rapidly losing value.
It’s simple math. Inflation has been hovering around 7% for some time now, while a basic savings account barely scrapes together 1% interest. That means the rising price of a latte, a week’s groceries, or a car outstrips any gains you make on your emergency fund by a long shot.
With your savings actively losing value, you might consider investing your emergency fund to maximize your growth potential. But should you? Generally, it’s a bad idea. Here’s why.
You Might Not Be Able to Access it Quickly Enough
The typical emergency fund is an urgent backup of savings to help you as soon as something goes south. If your dog gets hit by a car and needs immediate care, you can dip into this cash to cover your vet bills without delay.
You can withdraw cash from a personal savings account with relatively few hurdles or time delays, but the same can’t be said about all investments.
While some investments are nearly as liquid as savings, others are not. Depending on your investment, you may not be able to cash out as quickly as you expect.
Borrowing Comes with Interest and Finance Charges
When your investments are on hold, it can feel like you’re fielding an emergency without any savings at all. If your trip to the vet can’t wait, borrowing a line of credit may be the only way to save your pet.
The lenders at Fora Credit host simple and quick applications that may fast-track your access to a line of credit. If approved, you can draw against your limit and receive your money quickly.
A line of credit is a popular safety net used by millions of Canadians. However, like any personal loan, a line of credit comes with interest and finance charges. These extra fees mean you pay more this way than if you use basic savings.
You May Pay Taxes on Your Withdrawal
Usually, when you take out money from the ATM, you don’t have to worry about paying taxes on your withdrawal. At most, you may have to pay the earned interest on your account.
Cashing out your investments doesn’t go as smoothly from a tax perspective. If you sell at a higher price than what you initially paid, you’ll have to pay taxes on 50% of your capital gains.
While taxes aren’t the same as the interest and finance charges applied to a line of credit, they serve the same purpose. Capital gains tax adds to the cost of your emergency; you’ll pay more to access these funds than if you withdraw cash from a basic savings account.
You Could Lose a Lot of the Money You Save
Historically, stocks increase over the long term despite momentary ups and downs in the economy. But you have to endure these dips to capitalize on the eventual rise.
See: Do employees pay less taxes by exercising stock options pre-IPO?
Unfortunately, the nature of emergencies means you might have to cash out fast, long before you can see improvements over time. Worse yet, your investment may fall on the day you need to withdraw, meaning you have less money than what you started with.
Bottom Line
The stock market isn’t an ideal holding for your emergency fund. If you’re still worried about losing value on your savings, search for high-interest savings accounts instead. They earn more than the average basic account, so they’re a better defence against inflation.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
 |  |  |
Support NCFA by Following us on Twitter!Follow @NCFACanada  |
Related Posts
AI/ML is Essential to Driving Future Revenue and Remaining Competitive- SEC Drops Charges Against Ripple Execs: Crypto Regulation Shifts
- Bitcoin’s gender divide could be a bad sign, experts say
- Cost-effective way to Boost Customer Satisfaction
- How Carbon Pricing Impacts Fintech and Investment Strategies
- Russia proposes blanket ban on crypto mining and trading – undermines sovereignty of monetary policy
Leave a Reply