Emergency fund in cash or a S&S ISA?

JustAnotherSaver

At this moment in time my retirement pot is in the form of a SIPP (forgetting that i also have a workplace pension with the minimum being put in to it for a second).

I had no emergency fund and it was only through reading this forum that i even thought about it. It was mid last year when i started putting aside for it. With the other things i need to save for i decided not to lump all my savings towards this or towards that but to put what i can towards everything i need to save for, otherwise some things may never get started let alone finished.

I decided to go for 3 months wages. Not 3 months bills as i feel 3 months wages would be better which should give me about 5 months worth of bills really and i decided to do this over a 5 year spread setting a small amount aside each month.

Now hopefully i'll never need to call on it and it can end up being my funeral fund so that my family don't need to dip in to their pockets for that

Which then made me wonder whether any of the knowledgable folk here put their emergency fund in a S&S ISA rather than a cash savings account.

Now i'm not thinking anything like VLS100 or whatever. Something on the lower end of the risk scale that aims to at least keep with inflation. Preserve the pot in a way. I wouldn't know examples of these types of funds if they hit me in the face.


Anyway it's just something i was thinking about. Is it a terrible idea?
For me at least we're looking about the £5k mark when i'm done. Then it'll just sit there being worth less & less as time goes on.

So just wondering what others do? Just take the inflation-loss and accept it'll happen? Put it in to a 'low risk' fund that aims to keep with inflation? Put half in to cash savings & half in to a fund of some description?

mr_munchem

I'm not up to having an emergency fund quite yet, but I'll also be aiming for three month's wages when it gets to it. My natural inclination would be to have it in a good savings account (i.e. the best you can get at the time in easy access form), the last thing you want is to be having to dip into your emergency fund and finding it's in the middle of a drop in value (which could happen even with low risk funds). I'm sure somebody much more knowledgeable will be here soon, but just my 2 cents!

JustAnotherSaver

mr_munchem wrote: »

I'm not up to having an emergency fund quite yet, but I'll also be aiming for three month's wages when it gets to it. My natural inclination would be to have it in a good savings account (i.e. the best you can get at the time in easy access form), the last thing you want is to be having to dip into your emergency fund and finding it's in the middle of a drop in value (which could happen even with low risk funds). I'm sure somebody much more knowledgeable will be here soon, but just my 2 cents!

Yeah i can see that point too. Depends whether the individuals thinks it's worth the risk or not. You could argue that me putting aside over a 5 year plan is risky - what would happen if i needed it within those 5 years? Everything is what if but you make your decisions and stick by them.

£5k in a cash account will forever be £5k (plus accumulated interest). Take it out & you'll always have £5k in your hand. It may now only pay for 2 months worth of bills instead of 3 months but it'll be £5k (obviously i'm talking purely examples here).

Also for the record, should my pay increase - i would bump the emergency fund accordingly.
Should i get a cut in hours, change jobs and earn less or whatever - i would leave it as is and not take any of it out just because 3 months wage is now half it was, so by that i would only ever increase it, never decrease.

chockydavid1983

For small amounts, you can just about beat inflation with the best current accounts/ regular savers so why take the risk?
I prefer x months expenses as what I would need if I lost my job is much more closely related to that than pay. It makes sense to me to increase emergency fund over time with inflation to keep at the same x times expenses.

DrEskimo

Its an interesting point, but I view the emergency fund purely as an insurance policy.

I dont expect to make money from insurance, in fact, like most policies I actually hope I pay out and never actually need to use them!

I have the money sitting there so that if I am in an emergency situation, it allows me to pay for the essentials while I deal with it making sure that I don't have to cash out any long-term investments, which may be worth far less than they could otherwise be.

I think thats the other part you've hit on as well. Who knows when you may need to access this money. It could very well be that you lose your job amidst a financial downturn, whereby the emergency fund is now worth far less than the original deposit if it was invested in the market.

Like your example of adding to the fund if your salary increased, perhaps adding incremental amounts to the fund each year to account for inflation is a way to ensure that the fund is able to do what is intended. Indeed it follows that if inflation has raised the cost of living, then this will raise the amount needed to cover 3-months of expenses too. Perhaps linking it to the value of expenses, rather than wage is more useful in this respect?

ruperts

I’m quite convinced by the theories that say investing an emergency fund would work out best long term for most people. Trouble is, the emergency fund is there precisely because of the chance you might not fall into the category of “most people”.

I’m toying with the idea of putting a bit of mine into a low equity multi asset fund like vanguard lifestrategy 20%, another bit in the most liquid possible p2p, and the rest cycling through higher interest regular savers.

I also think “six months salary” or even “six months current expenses” is pointless, you’re not going to keep spending at the same rate in an emergency, so mine is six months’ worth of essential expenditure only. Even that contains an additional safety net because in an emergency i could take a payment holiday on my mortgage, use an interest free overdraft, borrow from family, bring some money in via the gig economy etc.

JustAnotherSaver

Just on the topic of wages, expenses, bills or any other term that may or may not get used here...

As the last post there stated - in a case of an emergency you're going to cut right back, or at least you should, so there'll be no buying the latest smartphone during this time period for example.

Still, I chose to save 3 months worth of wages because in the debate of bills vs wages my wages are the larger amount so I selected that for a safety net. I'd rather put more than enough aside than not enough.

I don't know if you're classing expenses as something else entirely but to me the bills are the essentials. Things you have to pay for and my wages are bigger than this - which is why I selected that as the target figure and not bills or what I consider to be expenses.



I should add that at the moment I'm saving at a rate that'll take me 5yrs to get 3 months. Once I've hit that target I plan on stretching that to 6 months and then a year but at a much reduced rate each time.

DrEskimo

JustAnotherSaver wrote: »

Just on the topic of wages, expenses, bills or any other term that may or may not get used here...

As the last post there stated - in a case of an emergency you're going to cut right back, or at least you should, so there'll be no buying the latest smartphone during this time period for example.

Still, I chose to save 3 months worth of wages because in the debate of bills vs wages my wages are the larger amount so I selected that for a safety net. I'd rather put more than enough aside than not enough.

I don't know if you're classing expenses as something else entirely but to me the bills are the essentials. Things you have to pay for and my wages are bigger than this - which is why I selected that as the target figure and not bills or what I consider to be expenses.



I should add that at the moment I'm saving at a rate that'll take me 5yrs to get 3 months. Once I've hit that target I plan on stretching that to 6 months and then a year but at a much reduced rate each time.

Oh yea I understand that. Taking the greater amount sounds sensible!
My point was merely that if it's based on expenses, the amount needed rises in line with inflation, as your expenses will rise with inflation. This may not be the case if you link it to wages. Obviously doesn't really matter how you define it as long as it achieves it's purpose...! I guess you could just say 6months of expenses/bills, and you would be targeting roughly the same amount?

As others have pointed out, I think the best bet is to take advantage of some of the high interest savings account with easy access. That will go some way to offset the inflation, while still remaining easily accessible. More importantly it's not at risk of diminishing below the principle amount, which it could do if invested in the market.

That's my plan anyway! So far it's just sat in a cash ISA earning about 0.01%, so I need to move it around!

Eco_Miser

I would say six months of expenses, rather than three months salary, it's more closely linked to what you will need.
In an actual emergency, whether that is losing your job, or your car breaking down, or your roof blowing off, you will use whatever money is available to cope.

So I just have a pile of cash, in the best paying accounts, that covers emergencies, planned spending, and buffering my investment income.

Not so long ago it was possible to beat inflation on over £50,000 cash. It's harder now, but should still be possible on £5,000.

Fatbritabroad

I have about 10k (shortly to go up to 16k with a January bonus) which equates to about 4 months bills . I normally keep about 20k but I've put a bit in p2p as my job is stable I knew I was getting my bonus (I've slugged half of it into my pension as I don't need it). I've also had several emergencies over the last year (new fridge, new fence and a leaking roof!) which has taken a chunk out but I was confident of being able to slowly replace and I'm due another large bonus in two years time so have allowed it to drift down. The p2p is actually reasonably liquid as it's a small amount 5.5k and about 2k is in a rolling monthly account so I could access all of this within 30 days losing minimal amount by selling on the secondary market. This is not money I expect to ever call on and am theoretically happy to lose the lot. My cash is spread across lloyds a bit in my santander current account to provide a float and the rest going into monthly savers with santander and nationwide. I could get more but can't be faffed with all the dds etc so this is as much as I can get for the amount I have. I'm 37 so most of my non pension capital (about 25k) is in a s and s isa.