Emergency savings – where should they be?

You’ve spent months or years building up your emergency savings so that if the worse happens, you’re ready. It feels great. But where’s best to keep your emergency fund? It can be confusing as emergency cash needs to be readily available but you don’t want to miss out on growth opportunities. Ultimately, it’s a balance between…

accessibility vs. performance

What are emergency savings?

The emergency fund is a crucial foundation for successful personal finance and creates stability by being prepared for unforeseen circumstances without needing to rely on a line of credit with associated interest charges.

“Emergency savings are a readily available account with funds specifically set aside for a personal finance crisis”  

Emergency savings are one of the fundamental pillars to financial fitness and should be prioritised above investing or paying off the mortgage.

Know more: Do you need an emergency fund?

Emergency Savings need to be quick and easy to get

The very basic premise of an emergency fund is that it’s a pot of money that can be used for emergencies. The nature of emergencies is that they bite. They bite hard and they bite fast. They can be upon you before you know it.

Therefore it is important that you can access your emergency fund as quickly as possible. If something big is broken, it’s usually important to you, and being without it will likely have some form of negative impact. If you’ve lost your job at zero notice, how do you pay important bills and put food on the table?

Know more: How big should your emergency fund be?

Top two places to store your emergency fund

It’s a question of balancing performance vs. accessibility and needs to be personalised to your individual accounts circumstances. You need to blance being able to quickly and easily get at your money, without missing out on growth opportunities. There are two main types of accounts to look at:
1. Instant access/low-performance accounts
2. Delayer access/high(er)-performance accounts

Storing emergency funds is about balancing accessibility vs. performance

1. Instant access/low-performance accounts

Accessibility is an important aspect of emergency savings. For that reason, most people don’t want their emergency fund locked away. Therefore, consider a ‘high interest’ savings accounts or cash ISA.

Many accounts are instant access (make sure to check the detail as some only offer one or two withdrawals a year before the ‘high’ interest rate is lost). However, with current interest rates as they are, gains will be minimal and are unlikely to even keep up with inflation.

That means £1,000 today won’t buy you £1,000 of the same stuff in five years time. You’re going to have to keep topping it up. Also, if you withdraw from an ISA, and have used your full allowance, you cannot put that money back in during the same financial year.

Know more: three MAJOR benefits of emergency savings?

2. Delayed access/high(er)-performance accounts

On the flip side, your emergency fund could be kept in an account that is higher performing. This could be a Stocks and Shares ISA investment wrapper.

If you assume an average return of 8% over the long term, this will likely outperform current inflation.

However, getting at it is trickier and takes time, usually a matter of weeks. What will you do for cash in the meantime?

Using credit for emergency cash

Emergency credit
Proceed with Caution!

This is the wildcard and an area that is hotly debated in the personal finance community; do you actually need your emergency fund as real money? Could it, in fact, simply be a line of credit? Personal Finance guru and blogger Big Ern writes a compelling case for this in his infamous blog series. Could your emergency fund be a £10k limit on a credit card? Possibly, though you need to proceed with caution and it depends on two important factors.

  1. Do you actually have the money? Do you actually have the £10,000 somewhere else, such as investments, that can be accessed to pay off the full credit card balance? If so, then the credit card can be a valid temporary way of accessing money whilst you draw down your emergency fund that is tied up in a high performing account.
  2. Do you have the discipline? Do you have the control to pay that credit balance off in full ASAP? Can you resist the temptation not to splurge on that easy, open line of credit and ‘pay it off tomorrow’? If you’ve had an unhealthy relationship with money or are in recovery, then watch out for this.

Emergency savings are about being able to get at readily available cash in a personal finance crisis. Where you keep them is down to your individual circumstances, just remember they’re there to get you out of a hole and quickly.

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Emergency savings – where should they be?