Put Rainy Day Fund into Premium Bonds?

bd10

tomla said:

bd10 said:

What's the risk tolerance? Does it have to be a savings product that does not beat or at least match a current rate of inflation of 5%? Personally, I do not hold than £500 in cash across some 0.25-0.6% interest accounts, all else (rainy day and amounts ear marked for the risk investment opportunity) is tugged away in low risk funds that I can sell anytime if I really had to. So far so good, breaking even against inflation.

Would you list your low risk funds please?

Capital Gearing Trust or the open ended version CG Absolute Returns, managed by Peter Spiller and his team.

Albermarle

There's a chart on mse showing expected returns of 0.5% for £5k & 0.83% for £30k

Can you share that as it needs correcting .

The actual return on Premium Bonds is 1% , but 0.9% tends to be quoted as the tiny tiny chance of winning a Million is discounted from the calculation.

Otherwise the odds are the same if you hold £5K or £50K .

The difference is only that the more you hold the more likely you will have a return close to 0.9%.

So if you held £5K , then your predicted return would be somewhere in the range of zero to 1.8% - on average 0.9%

csgohan4

PB seem the flavour of the year so far, but previously they had awful returns. But good thing is they are backed by the tax payer and is safe.  Shame only 50k per person, would have preferred if they matched the level banks offer protection, which is 85k

OldScientist

ZeroSum said:

eskbanker said:

ZeroSum said:

The expected return on £10k is about 0.6%.

Where are you getting that from?  The MSE calculator shows a 68.4% chance of at least 0.75% and 47.8% of 1%, so the average expected return is the same 0.9% as it is for any other holding size.

ZeroSum said:

MX5huggy said:

Yes, (but it depends on the rate on the ISA). 

PB’s pay on average 0.9% £10k over year os should average this. 

All my cash savings are in PB’s you can withdraw with 3 days notice or set it to withdraw the day after the prize draw.

They don't. 0.9% is for the full £50k

The less you have, the smaller the expected returns 

Nonsense - in percentage terms the expected return for any holding for any duration averages 0.9%, but greater volatility (higher standard deviation) should be expected for smaller holdings or shorter timeframes.  In case you'd missed it, every bond has an equal chance of winning, so the average expected returns are a fixed percentage of the size of the holding, whereas your rather odd theory would have some bonds having better odds than others, which is patently not the case....

There's a chart on mse showing expected returns of 0.5% for £5k & 0.83% for £30k

As eskbanker said, there is greater volatility in returns for lower numbers of bonds. In the following graph, the effective interest rate for holding the number of bonds stated for one year is given at three levels of probability (for longer periods multiply the number of bonds held by the period, i.e. 10k bonds for two years is equivalent to 20k bonds held for one year): 10% (unlucky, lowest line), 50% (median - the expected rate given in the MSE article, middle line), and 90% (lucky, upper line).

The sawtooth pattern arises because the interest comes in £25 lumps. Holding more bonds (or holding bonds for longer than 1 year) does reduce the range of (edit) possible likely interest rates.

OldScientist

Albermarle said:

There's a chart on mse showing expected returns of 0.5% for £5k & 0.83% for £30k

Can you share that as it needs correcting .

The actual return on Premium Bonds is 1% , but 0.9% tends to be quoted as the tiny tiny chance of winning a Million is discounted from the calculation.

Otherwise the odds are the same if you hold £5K or £50K .

The difference is only that the more you hold the more likely you will have a return close to 0.9%.

So if you held £5K , then your predicted return would be somewhere in the range of zero to 1.8% - on average 0.9%

Article is at https://www.moneysavingexpert.com/savings/premium-bonds/ - it isn't incorrect, just incomplete (and, consequently, potentially misleading)...

jimjames

How long does it take to get hold of money from premium bonds? My definition of emergency fund is money that is available immediately or within a day or two.

For £10k a cash ISA is probably pointless but you can get approx 1% on that using 2/3 current accounts

Albermarle

In the second post of this thread , a three day withdrawal is mentioned.

eskbanker

OldScientist said:

Albermarle said:

There's a chart on mse showing expected returns of 0.5% for £5k & 0.83% for £30k

Can you share that as it needs correcting .

The actual return on Premium Bonds is 1% , but 0.9% tends to be quoted as the tiny tiny chance of winning a Million is discounted from the calculation.

Otherwise the odds are the same if you hold £5K or £50K .

The difference is only that the more you hold the more likely you will have a return close to 0.9%.

So if you held £5K , then your predicted return would be somewhere in the range of zero to 1.8% - on average 0.9%

Article is at https://www.moneysavingexpert.com/savings/premium-bonds/ - it isn't incorrect, just incomplete (and, consequently, potentially misleading)...

The MSE information on Premium Bonds has always been misleadingly presented, which often seems to lead to some strange misinterpretations!

In this case they're not even being consistent, in that their median figure for £5K is shown as £25 (0.5% return) in that chart in the main article, but their own calculator has the median as £50, although a 52.5% chance of a 1% return sounds wrong to me, in the context of the generally-agreed 0.9% distribution that accounts for >99% of the prizes.

The chart is undoubtedly misleading in its selective presentation of inaccurate data, but this is then compounded by the way the conclusion is shown:

Yet as you can see the more bonds you have, the more likely you are, with average luck, to win closer to the prize rate – though most people will always win less than it.

This is perhaps intended to support the point made in the above graph, about the likely range narrowing over time (or with larger holdings), but obviously confuses some, and, given the emphasis on the difference between the median 'likely' return of 0.9% and the mean published prize rate of 1%, it would make far more sense to state that (by definition) as many people exceed the median as undershoot it, i.e. returns converge towards 0.9% from below and above....

OldScientist

eskbanker said:

OldScientist said:

Albermarle said:

There's a chart on mse showing expected returns of 0.5% for £5k & 0.83% for £30k

Can you share that as it needs correcting .

The actual return on Premium Bonds is 1% , but 0.9% tends to be quoted as the tiny tiny chance of winning a Million is discounted from the calculation.

Otherwise the odds are the same if you hold £5K or £50K .

The difference is only that the more you hold the more likely you will have a return close to 0.9%.

So if you held £5K , then your predicted return would be somewhere in the range of zero to 1.8% - on average 0.9%

Article is at https://www.moneysavingexpert.com/savings/premium-bonds/ - it isn't incorrect, just incomplete (and, consequently, potentially misleading)...

The MSE information on Premium Bonds has always been misleadingly presented, which often seems to lead to some strange misinterpretations!

In this case they're not even being consistent, in that their median figure for £5K is shown as £25 (0.5% return) in that chart in the main article, but their own calculator has the median as £50, although a 52.5% chance of a 1% return sounds wrong to me, in the context of the generally-agreed 0.9% distribution that accounts for >99% of the prizes.

The chart is undoubtedly misleading in its selective presentation of inaccurate data, but this is then compounded by the way the conclusion is shown:

Yet as you can see the more bonds you have, the more likely you are, with average luck, to win closer to the prize rate – though most people will always win less than it.

This is perhaps intended to support the point made in the above graph, about the likely range narrowing over time (or with larger holdings), but obviously confuses some, and, given the emphasis on the difference between the median 'likely' return of 0.9% and the mean published prize rate of 1%, it would make far more sense to state that (by definition) as many people exceed the median as undershoot it, i.e. returns converge towards 0.9% from below and above....

The apparent median interest rate is even wilder below 5k bonds (one of the reasons I left it off the previous graph). Perhaps a better graph than the one I presented earlier is the following...


This shows the 10% (lower line), 50% (median), and 90% (upper line) winnings over a year given the number of bonds held. Although the lines are stepped (at £25 pound intervals), the more bonds held the greater the winnings will tend to be.

eskbanker

OldScientist said:
Although the lines are stepped (at £25 pound intervals), the more bonds held the greater the winnings will tend to be.

I may be missing the point you're making, but don't believe that anyone has ever disputed the common sense fact that "the more bonds held the greater the winnings will tend to be" (in absolute terms), but the earlier poster was apparently under the impression that more bonds gave greater winnings in percentage terms, whereas your most recent graph clearly shows (broadly) linear progression, as expected, rather than curves.  Personally I prefer your first graph!