Maintaining value of your emergency Fund

DireEmblem

I received a nice email today, that my interest rate is going to be reduced again, that got me thinking - where should I hold my emergency fund now?

I think I'm lucky having 6 months of bills set aside, but if the government inflation target of 2% is maintained, then simply holding it in an easy access cash account, its losing money.

The MSE list currently has 0.75% at the top easy access, and my new rate is to be 0.7%, so I could switch to that, but its still 1.3% below the inflation target.

So my thoughts are - what if I put part of my emergency fund into a cheap global equity fund.  The FTSE All world Index has returned an average of 8.1% since 2005.  All things being the same, if I were to deposit a months emergency fund into a FTSE All world tracker fund, then long term, this could in effect increase the 0.75% by 1.225% ((8.1%-0.75%)/ 6) to 1.925%.

Is this a sensible option, or are there other options out there to help protect the value of easy access funds?

grumiofoundation

The difference between 0.75% and 2%  is not a lot - e.g. for £2000 this is only £25. WIll this make a huge difference to your emergency fund?

If you put one month of your emergency fund into (high-risk) investments, which could drop 25% easily - is it really part of your emergency (cash) fund any more? Effectively you have invested a couple thousand more and reduced your emergency (cash) fund by 16%. 

Long term investing is sensible, having an emergency fund is sensible - you seem to be trying to conflate the two but investments aren't really suitable for emergency fund (that you want to maintain capital value of). 

george4064

I think the key thing to remember that your emergency fund is what it’s there for, emergencies, and hence isn’t necessarily intended to be earning the maximum interest available.

Alexland

Sure move it around to get the best rates but try not to worry about how that is still below inflation as hopefully it is only a small drag on the overall returns you would expect to get across all the assets included in your net worth. Consider it, like bonds, as within the lower risk/return proportion of your asset allocation.

JustAnotherSaver

I just put 3 months wage in to an account and said see you later to it. 
If there comes a point when it is no longer 3 months wage (and I'm not talking about inflation) then I'll add to it. 
Until then, its forgotten about. 

mrkds

My emergency fund is in a high rate regular saver which is due to end soon. Im considering putting it in premium bonds. The prize rate is crap but there is a very slight chance of hitting one of the big prizes. Can withdraw when I want and it's fully protected. If you have more than 5k, it is  better than a sub 1% easy access account. 
I would never put an emergency fund in a non-FCA protected investment. I would only do that for 'spare' caah that I could afford to loose. 

Thrugelmir

DireEmblem said:

 but if the government inflation target of 2% is maintained, then simply holding it in an easy access cash account, its losing money.

When was CPI last 2%? 

DireEmblem

@Thrugelmir
Not sure when it was last 2% exactly, but it was 1.8% in January this year, and 2.5% in 2018.  I've taken 2%, as that's the Government target, and a good average-ish barometer looking over historic figures.

@grumiofoundation
I get the point that the difference is not a lot, but I can be a bit of a look after the pennies and the pounds take care of themselves type person.  I get that £25 is not a lot on £2000, but over the next ten years it would amount to 13.2%, or 20 years(hopefully don't have to work that long), would be 28% effective loss due to inflation.

@mrkds
Yes I had a look at that - its not guaranteed but a sizeable balance of an emergency fund should hopefully be sufficient to average things out on average luck and return 1% a year rather than 0.7%.

Alexland

Worth spreading your emergency fund across a couple of unrelated financial institutions incase there are problems accessing the account or processing the withdrawal. It once took AA about 3 weeks with lots of chasing to return my money held in an easy access account due to their administrative inadequacies. In an emergency the last thing I would want to do is need to join the long queue for NS&I customer services because the withdrawal wasn't working properly...

Sailtheworld

DireEmblem said:

Is this a sensible option, or are there other options out there to help protect the value of easy access funds?

If you're worried your emergency fund has been eroded by inflation just stick another £20 in it.

Bravepants

I've followed the crowds and popped my emergency fund into Premium Bonds. Yes, the return is likely less than inflation but WORSE, I have any winnings paid into my current account for spending! Mmmwwwhhhaahahahaha!!!