In January, Canadians will be able to take advantage of a new investment venue, the TFSA (Tax Free Savings Account). Using a TFSA, we will be able to shelter up to $5000 a year, to grow without being subject to Canadian and provincial taxes. Unused contributions will be available in following years, and any money taken out of a TFSA will also be added back to the next year's contribution limit.
Personally, one of the things I plan on using the TFSA for will be my emergency fund. That way, I will no longer pay taxes on the interests received from that money.
Up to now, my emergency fund has been composed of a high-interest savings account, as well as a 1-year GIC ladder, with one step every month. If you are not familiar with the term, a GIC ladder is a number of GICs, each with the same length, but each made a certain lenght of time after the previous so that the all the GICs together cover the length of the ladder.
For example, my 1-year GIC ladder is composed of 12 GICs, each with a 1-year term. One is started in January, a second one in February, March, and so on. Whenever one of the GICs come to its term, the money is reinvested in another 1year GIC.
A ladder is useful to average out the interest rates available on GICs, and also guarantees that some money will flow out every months, should there be an emergency. If a big emergency requires money than 1 month's money, it is always possible to cash out of a GIC before its term, although doing so reduces the interest that will be paid on that money.
As January 2009 approaches, I have decided to stop reinvesting the money coming out of my ladder, so that I can put a bigger chunk of money into my TFSA right at the beginning of the year. Once the money is in the TFSA, I'll start a new GIC ladder in the TFSA.