How Much of Your Emergency Fund Should Stay Liquid vs. Be Invested in a GIC?

An emergency fund is a personal safety net made of money that you save and set aside for truly unexpected emergencies.

Think of it as a backup plan in case something goes wrong. For example, it could come in handy if you suddenly lose your job or discover your car needs a major repair. You shouldn’t think of it as savings to dip into for discretionary expenses, like a new phone or a vacation. 

How much should you save? 

The amount you keep in an emergency fund depends on your personal circumstances, including your expenses, income stability, and financial obligations.

The rule of thumb is typically to have enough in your emergency fund to cover your living costs (such as rent, food, and utilities) for three to six months—such as:

• Housing costs
• Child care
• Utilities
• Groceries
• Transportation expenses
• Insurance premiums
• Minimum debt payments 

With an emergency fund, you can find comfort in knowing that you can handle a crisis without having to borrow money.

“Liquid” savings are funds that you can access easily and quickly without penalties. It’s money you can generally withdraw or transfer without waiting for an investment term to end.

More liquid: Cash in a chequing or savings account (easy to access right away).

Less liquid: Money invested in a GIC or property (may take time or involve penalties to access).

Examples of liquid savings

• Chequing accounts
• Savings accounts
• Cashable GICs
• Other cash-equivalent accounts that allow quick access to funds

These accounts are often used for emergency savings because they provide convenient access to cash when unexpected expenses arise.

GICs are low-risk investment products with flexible terms and features. Depending on the type of GIC, you may not be able to access your money until the end of the term, while cashable GICs let you withdraw it sooner.

At the end of the term, you receive your principal (i.e., the original investment) plus any potential interest earned. 

Savings Account vs. GIC

GICs can help savings grow faster than they might in a traditional savings account. However, many GICs are non-cashable, meaning funds cannot be accessed before the term ends. 

Because of this trade-off, GICs are generally best suited for only a portion of emergency savings, and only after a sufficient liquid cash reserve has been established. 

Types of GICs

Depending on the provider you may encounter different types of GICs, which may include: 

Understanding the features of each type can help determine whether a GIC is appropriate for a portion of your emergency savings. 

If you already have a large, well-established emergency fund, a GIC may play a small supporting role.

A simple way to think about the balance

• Keep the money you may need immediately in a savings account.
• Consider a GIC for funds you are confident you won't need in the near term.
• Review your emergency savings regularly as your expenses and circumstances change.

There is no single percentage split that works for everyone. The right balance depends on your financial situation, expenses, and how comfortable you are with risk.

For many people, keeping most of an emergency fund in liquid savings, such as cash or cashable GICs, while allocating a smaller portion to a GIC can help balance accessibility and growth potential.

While GICs are generally considered lower-risk investments, they are not entirely without risk.

Potential risks to consider

Some potential risks to consider may include:

• Limited access to funds during the term
• Potential penalties for early withdrawals

If a significant portion of your emergency savings is locked into a GIC, you may have limited access to those funds when an emergency occurs.

Some GICs allow early withdrawals, but this may result in penalties or reduced interest earnings. Also, you may need to contact your TD Personal Banker to make a withdrawal.

For this reason, it's important to maintain enough liquid savings to cover unexpected expenses while considering a GIC only for funds you do not expect to need immediately.

Key takeaway: Not every savings goal requires the same approach. Money you may need immediately is generally best kept in a liquid savings account, while money earmarked for future planned expenses may be suitable for a GIC. 

Using a combination of both can help you prepare for unexpected emergencies while allowing some savings to earn a potentially higher return.

Should an emergency fund be fully liquid?

Most of your emergency fund should be easy to access. Since the purpose of an emergency fund is to cover unexpected expenses, keeping some or all of it in a savings account can help ensure the money is available when you need it. 

Can I use a GIC for an emergency fund?

Yes. A GIC may be suitable for a portion of your emergency fund if you have enough liquid savings to cover immediate expenses. Cashable GICs allow earlier access to your money, while non-cashable GICs are better suited for funds you don't expect to need right away. 

What happens if I need money from a GIC early?

Access depends on the type of GIC. Some allow early withdrawals, while others may not or may charge penalties. Check your confirmation of investment document or contact your GIC issuer before attempting a withdrawal. 

How much should I keep in cash?

The amount depends on your expenses and personal circumstances. Aim to keep enough liquid savings to cover approximately three to six months of essential living expenses.