Too safe

  By Guest Blogger Doug Rowat

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Conventional financial-planning wisdom says that you should always have the equivalent of three-to-six months’ salary tucked away somewhere safe to handle emergencies. I’ve heard this mantra since I started in this business more than 25 years ago.

The below, for example, can be found on a competitor’s website.

And I’m not throwing stones in glass houses because I’m sure similar messages can be found on my own company’s website. It’s advice that’s been repeated so often that it’s become gospel.

Three-to-six months’ income for emergencies has become gospel

Source: Wealthsimple

The main unforeseen emergency, of course, is a job loss and according to StatsCan, the average time that a Canadian remains unemployed stands at about 20 weeks
(https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1410005701). This number bounces around a fair bit year to year, but let’s call it five months. So, from this perspective, the three-to-six-months-salary rule of thumb seems prudent.

But let’s examine this. The main problem here is that, for most of us, we spend the vast majority of our professional lives fully employed. If we’re working, mostly continuously, from age 20 to, say, age 60, this equates to an extraordinarily long period to keep three-to-six months’ salary constantly sheltered and earning next to nothing.

StatsCan also notes that the median income in Canada is about $45,000, so five months’ salary amounts to almost $19,000. If you tuck $19,000 away in a zero-risk, fully liquid investment, you might annually earn 1.25% at money-market rates (the long-term average). Remember: the traditional advice suggests that you want these emergency funds entirely safe and always accessible. After 40 years, all else being equal, this five months’ salary will have grown to only about $31,000.

If you’d taken this same $19,000 and placed it in a balanced and diversified ETF portfolio earning 6% annually, after 40 years you’d have almost $195,000. Your balanced and diversified portfolio, like the zero-risk investment, would also be fully liquid because that’s a core feature of ETFs. (Btw, the argument that low-risk fully liquid investments currently offer rates better than 1.25% doesn’t hold water because the returns on balanced portfolios in recent years have also been much higher. Future rate-of-return assumptions have to be made based on long-term history.)

Your risk with the balanced portfolio option obviously becomes market volatility. You might be accessing these funds in a down market and have less than your five months of salary available.
But let’s also look at this scenario in more detail. Even if you suffered the worst timing possible and put your emergency funds into a balanced and diversified ETF portfolio and suffered a 20% drawdown the first year because you ran directly into a bear market (we’ll assume a 30% decline for equity markets and a more modest 20% decline for a balanced portfolio), you’d still have more than $15,000 available, or still about four months’ salary.

Further, if there’s no bear market within the first four years then you’d be no worse off (i.e., you’d still have about $19,000 available if a job loss and bear market were to occur after year four). And after less than 10 years, you’d have earned EVERYTHING that you would have earned keeping the emergency funds safe for 40 years.

I also haven’t given any consideration to other sources of emergency funds—employer severance, EI benefits, that old camper van you never use, your generous family, etc.
I appreciate that if you’re faced with a job loss having five months’ salary guaranteed to be waiting for you is undeniably comforting. And only you know the condition of the industry you work in, how marketable your skills are, the bills you have to pay and the strength of the job contacts in your Rolodex. If you anticipate your situation translates into much more time to find a new job than the average Canadian then maybe the standard recommendation for emergency-fund levels is appropriate.

I also understand there are other kinds of emergencies; health related, for instance. But if these emergencies become something more than temporary, isn’t it likely that you’d have to dip into your investments anyways?

However, for most, the price being paid to have long-term emergency-fund peace of mind is steep.

Sometimes an emergency fund’s not a safety net, it’s just dead weight.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/03/14/too-safe-2/