I totally feel like this GIF video. It has been a long, hard and at times strenuous 4 years. There were times when I just wanted to give up on this aggressive debt repayment thing (no lie) and just live my life managing my debt . A lot has happened since then:
- My husband and I finally got fed up of carrying around our $120k combined student loan debt and we paid it off in 2.5 years. It took a lot of financial sacrifice. No trips, no new clothes (unless required for work), no gifts to each other except only on anniversaries and only a maximum of $50 each (no birthday or Christmas gifts), no eating out (we probably ate out 5 times a year…sometimes you just gotta) and a lot more. It is not a way I would like to live for the rest of my life, but it was worth it for the almost 3 years we had to do it.
- Just before we started paying off our debts almost 3 years ago, my husband and I got married. We cash flowed $6,500 for the wedding and our parents helped us out with the rest.
- My husband and I relocated from Ontario to Alberta 4 years ago for better work opportunities and we appreciate the experience and cash flow.
At the beginning of 2016, my husband and I set out to fund our emergency fund up to $10,000 by March 31st, 2016. This goal was reached on time and we are super excited about that. We follow the GIC laddering strategy for storing our savings for things like the emergency fund.
A GIC is a guaranteed investment certificate (term mostly used in Canada), but it is similar a term deposit or a certificate deposit (CD) in the United States and elsewhere. You lock in an $X number of dollars for a fixed period of time at a guaranteed interest rate. If interest rates go down, you are still guaranteed your rates, if they go up…well, you are out of luck. Interest rates on GIC’s or term deposits tend to be slightly higher than a putting money in a basic savings account (which you can take in and out as you please), but returns are not nearly as high as investing the money in the stock market (for obvious reasons such as risk).
Its important to check before locking your money in a GIC/term deposit if the bank you are with will charge you a penalty if you need to take out your money before the deposit matures (the length of time you agreed to keep the money in). With our online bank, they do not charge us anything for breaking our GIC, but they withhold any interest we earned during the time the money was in there for the GIC we are breaking. We understand this and this is why we keep our terms fairly short….because we don’t know when we might need the money. This is also why we do not lock the first $2,500 but keep it open in a basic savings account.
We know that interest rates are low right now and we could have our money grow quicker by putting it in more aggressive investments like stocks (while using debt for emergencies), but to us, an emergency fund is not about maximizing returns, but rather about financial security for the short term.
Here is our updated financial summary:
Previous balance: $2,500.00 (Jan & Feb 2016)
Interest + Other Additions: $159.47 (during Feb 2016)
Windfall Income Expected (tax refund) $4,964.34 (March 2, 2016)
Contributions in March 2016 $2,376.19 (during March 2016)
Interest earned in March 2016 (promotional 2.50%) $14.90 (for March 2016)
Total Amount Saved $10,014.90 (March 31, 2016)
Goal Reached: $10,000.00 (by March 31, 2016)
Surplus: $14.90 (for March 31,2016)
The reasons why we don’t “invest” our short term savings like the emergency fund or use debt to fund emergencies are because:
- Emergency money should be set in place to meet “unexpected expenses”. These funds need to be readily available for use without penalty or fees for withdrawal. Most investment vehicles will charge you for withdrawing your funds in the short term.
- Its about preserving our principal amount of $10,000. Having $10,000 sitting in a savings account or GIC with low interest rates does not make me feel like my money could be performing better if invested in more aggressive vehicles, or that I am losing out and the bank is winning by taking my money and loaning it out to other people. It actually gives me peace of mind knowing that in the event of an emergency, I can minimize financial distress by not relying 100% on debt.
- Speaking only from my own personal experience with debt (and I have my fair share of it), using debt to finance emergencies creates the perpetual feeling of owing someone each pay cheque and watching your hard earned money go towards paying off interest. The debtor is slave to the lender. I prefer the freedom and peace and mind that I have now over my finances then I did before. I hope to keep it this way moving forward.
So here is how we distributed our emergency savings with Tangerine using the laddering strategy approach:
|Amount invested||Type of account||Interest rate|
|$2,500||Basic savings account (non-registered)||0.80%|
|$2,500||1.0 Year GIC (non-registered)||1.60%|
|$2,500||1.5 Year GIC (non-registered)||1.70%|
|$2,500||2 Year GIC (non-registered)||1.80%|
To learn why we use the GIC laddering strategy visit my previous post. Waiting to save the full $10,000 has actually worked to our favor as interest rates have got up slightly from a month ago.
We decided to do GICs of no more than 2 years because:
- We like the idea of always having a GIC maturing in the near future.
- Because this is an emergency fund, in the event we need more than the first $2,500 (which is not locked in a GIC) right away, we hope to have earned some interest a few times over by renewing the GICs to future short term maturity dates.
- We like the flexibility of being able to take of advantage of better interest rates in the future when interest rates rise. Having short term maturity dates allows us to do that. When one GIC matures, we may be able to take advantage of the next best interest rate
- This is also why we never have a GIC automatically renew after maturity.
Although this takes the work of having to figure out where to invest your money, there could be other financial institutions offering better interest rates. Also, even within the same institution, you may be better off choosing a GIC with a lower interest rate but a shorter maturity term, then wait it out to see if interest rates will go up in the near future.
Our next short term financial goal is to save $3-$4k for a one week overseas trip this fall. This will be our first vacation that was not a “staycation” in 3 years as we put off going on any trips while getting rid of our student loan debt. More on this savings goal in future posts.
Tags: a lot of debt, budget, emergency savings, financial goals, financial planning, GIC, gic laddering strategy, goal setting, goals, reaching your goals, safe investments, save, saving, saving for a rainy day, saving for an emergency, saving for the future, saving money, saving money on school, Savings, savings for school, savings goals, savings strategies, SMART goals, student debt, student loan, Tax Free Savings Account