Why it’s worth having some money stowed away in a Plan B fund

Let us just for a moment consider the downside of putting money away in savings. Yes, there are some. Not of any great significance, but they need to be addressed from time to time so people don’t lose sight of how important it is to have money parked safely in a Plan B fund.

One of the objections to savings was voiced recently by a reader. “What is the point of having a savings account if the government is going to tax it?” this person asked. “You pay income tax while working and the government taxes you again on the same money you earned from working if you save it.”

It’s true – interest paid on savings doesn’t get special tax treatment in non-registered accounts, like dividends and capital gains do. It’s entirely possible that onethird to one-half of your interest could be taxed away if held in a non-registered savings account.

What makes this all the more annoying is the low rate of interest paid these days on savings. Maybe 1.5 per cent or 1.55 per cent at best. Does anyone not know that the S&P/TSX Composite Index was up 33 per cent for the 12 months ended April 30 on a total return basis?

Interest on savings is minimal, and the government takes a lot of it. What is the point?

The best way to think of savings is not as an activity you do with gains upper most in your mind. Interest on savings is an important reward for good behaviour, but the ultimate point is the savings itself. If you put $2,000 in savings, that’s $2,000 available in case you lose your job or have your hours cut. Or to help cover the cost of fixin gale akin your basement, engine problems in your car, a surprise illness affecting your pandemic puppy or a dental emergency. Boomer parents, almost all these expenses could apply to adult kids you’re helping financially as much as yourself.

A year ago, with the pandemic flaring, we were all pretty clear on the benefits of having money parked in savings for emergencies. But while a segment of the population struggles financially as a result of job interruptions, many people have been stunned in a good way by all the money being made in financial assets. Add high levels of taxation on savings and you have a fair argument for questioning the point of parking money in something like a savings account.

The counterargument, in a word, is life. At some point, most of us will have an emergency requiring some cash. Imagine how relieved you’ll be if you have some.