Can your investment ISA also be your emergency fund?

cupcakeforever

Hello
Can you please give some guidance. Can my investment ISA also be my emergency fund? eg I have £1k in cash easy access, but I want to start building up a fund for my kids uni costs etc. Every month I want to put it into my investment ISA. What are the disadvantages of also keeping this long term fund as also my emergency fund if I lose my job etc. ( hopefully this is unlikely).

I know there used to be complex rules about taking money in and out of ISAs but I'm not sure how things stand now.

I know compound interest works differently in investing compared to savings account, I get that concept (just), so is it the case that if I take money out when the market is down it will be really catastrophic for my fund and that's why you want emergency money in a cash fund? Or can I just, as I said, keep my all my spare money in my investment fund ( I would have a separate cash account for foreseeable things like Christmas, appliance breakdown etc).

Thanks

jimjames

If you accept that if you need to use the money in an emergency it might be worth less than you put in then yes you can do that but most would consider it a high risk strategy. Having said that I ran with a very small emergency cash fund for many years and directed most into investments because I had reasonable job security and decent credit card available.

k12479

Aside from the risk of your investment losing value in the short term, there's also the risk that the more catastrophic the situation the more your investments are also likely to be hit (e.g. like what happened during COVID).

There's also a potential risk of how long it may take to get access to the cash. If an emergency occurs on Friday evening, the earliest your investments could be sold is Monday. Add in transfer times or public holidays and it could be another day or two.

PRAISETHESUN

There's two problems I foresee with your approach: the first is that you might be forced to sell at a bad time, meaning you get out less than what you initially put in, and secondly there could be potential issues with liquidity depending on the type of investment, and as well as the time you need to sell them.

A balanced investment portfolio usually has some component of cash, so in theory that could be part of your emergency fund, but you need to consider how readily available it is (eg. is it tied up in fixes) and if there is enough cash to actually cover your anticipated emergency.

Eyeful

1. An emergency fund is for emergencies, which occur without warning & at any time.
So an emergency fund should be in CASH!.
If you want it to be in a Cash ISA is a personal choice. 

2. The question you need to ask is "How big should my emergency fund be?"
 All our circumstances will be different.so again it is down to personal choice.
The often quoted size of this fund is 3 to 6 months of your  monthly household expenses

3. Investments I would say, should be in an stocks & shares ISA.
The drawbacks with using this as your emergency fund:
(i) It may be in a market crash when you need the money so price you get will low.
(ii) its a waist of a tax allowance. 

4. Options:
(a) Put your money fist into a savings account & once you believe it is large enough start  your stocks & shares ISA..
(b) Put half into the savings account & half into the stocks & shares ISA. Once the emergency fund is big enough, all goes into the S&S ISA.

cupcakeforever

Thank you everyone. Hadn't thought about liquidity issues.

wmb194

Withdrawals from investments and investment accounts can a little slow as well e.g., up to four days with OEICs for the money to be available for withdrawal and brokers and platforms sometimes use faster payments but often still use Bacs. So a sale of an OEIC on a Monday could only see the money in your current account the next Tuesday if sent by Bacs.

US shares now trade on T+1 (Europe still T+2) so the money should be available to withdraw next day and then it would be however long the broker/platform takes but would be faster than an OEIC.

jimjames

cupcakeforever said:

Thank you everyone. Hadn't thought about liquidity issues.

Really depends on what emergencies you're hedging against as well. Losing job - few days delay getting funds won't be an issue. Seriously expensive car repair - pay on credit card and settle next month so delay not an issue. There are very few issues I can see that would require instant access to cash rather than instant access to payment facility.

DiamondLil

I use my investment ISAs for emergency funds and have always done so. I don't have cash ISAs. I use credit cards for emergencies. There is always a little cash in the ISAs plus a little cash in savings accounts for small, immediate needs.

However, having spent many years poor as a church mouse, I'm well used to living hand to mouth and happy to take the gamble on markets falling just before I need to sell.

Eyeful

If you do not have the cash to pay off the credit card by the end of the month you have to pay interest on the card.
If the emergency amount is large, the amount in interest you pay will also be large due to the % interest imposed by the credit card companies together with eighth wonder of the world, compounding! 

That why I prefer cash for rainy day events and credit cards for shopping.

ZeroSum

I have an emergency fund
Then there's the emergency, emergency fund
Then the S&S ISA (which is my retirement fund) is also the defacto emergency, emergency, emergency fund. Which hopefully will never be used before I retire