Should an emergency fund be kept in cash or a Short Term Money Market Fund

robaber

Hi 

I currently have an Emergency Fund of 6 months of expenses. 

Half is in an instant access savings account and half in a cash ISA.

Should it be kept in cash or should I consider moving it or half of it into a Short Term Money Market Fund, in order to generate a higher return?

EthicsGradient

Are short term MM funds getting a significantly higher return than cash? The best over the past 6 months seems about 2.2%, which I suspect is slightly lower than the best cash ISAs were, since they're now offering about 4.4% over a year, and that's after a couple of base rate cuts in the past 6 months.

Emmia

I think the key is that the fund (or a proportion of it) should be pretty much instant access - so a cash savings account, premium bonds, instant access cash ISA.

Part of it could be more locked away in an account limiting withdrawals or in something like a notice account offering a better rate, but in that situation I'd ensure the instant access amount more than covered the expenses that could be incurred during the notice period.

Edit: I would save the "instant access" pot first, and then move on to saving the "slower access" pot. I'd stop saving for them both when I had a year's worth of expenses, but would review and top up as needed due to inflation or costs / financial commitments increasing.

Linton

In my view the over-riding purpose of an emergency fund is to meet any emergencies. Any gains you make on the money are comparatively irrelevant or even counter productive if they add extra risk or unacceptable delays in accessing the money.  MM funds could add some risk or incur delays should events lead to large numbers of people wanting to cash them in simultaneously.

It seems to me there are more important things in life than worrying about making a small amount of extra money from a pot not intended for that purpose.

InvesterJones

Linton said:

In my view the over-riding purpose of an emergency fund is to meet any emergencies. Any gains you make on the money are comparatively irrelevant or even counter productive if they add extra risk or unacceptable delays in accessing the money.  MM funds could add some risk or incur delays should events lead to large numbers of people wanting to cash them in simultaneously.

It seems to me there are more important things in life than worrying about making a small amount of extra money from a pot not intended for that purpose.

Agreed, but it's possible to tier the approach. OP is suggesting only moving half of their 6 month pot to a STMM fund. I don't see too much problem being able to access with roughly 3 months notice (granted, 6 month is not a linear amount, it's there to cover the unexpected which might not be evenly spaced). But it does depend if that's really any significant gain - noting there may be other benefits in the cash ISA like flexibility to restock it if you've taken from it and it's a flexible ISA.

DjangoUnchained

I keep most of my emergency fund in an atom easy access account currently paying about 4.6% aer,  but drops to about 2.6 for any month you withdraw anything.  But if I withdraw it would be for an emergency so I'd not be concerned about losing a bit of interest on that month 

dunstonh

STMMs would see you having to wait for the next dealing point plus 2 days settlement and then payment from the platform to your bank. That puts you at around a week before you get the money.      That isn't very helpful for an emergency fund.

GeoffTF

dunstonh said:

STMMs would see you having to wait for the next dealing point plus 2 days settlement and then payment from the platform to your bank. That puts you at around a week before you get the money.      That isn't very helpful for an emergency fund.

It depends on your broker. An ETF sale should be settled on the next working day. HL and Vanguard both send cash withdrawals by Faster Payments. With them, there is a good chance that you will receive the proceeds of an ETF sale on the next working day, but that is not guaranteed. There could be other hold ups. Your bank could hold up the payment for money laundering checks, for example.

Money market funds are not completely safe. It should always be possible to sell ETF shares, but that may be at a discount to Net Asset Value. OEICs can suspend trading.

I would not use money market funds as a source of emergency cash. I use a Santander Edge account as my main current account along with Edge Saver. I also have cash in a Skipton account, which has my Santander Edge account and my Nationwide FlexAccount as nominated accounts. If that is not enough, I also have gilts with HL, and other investments with iWeb and Vanguard.

OldScientist

robaber said:

Hi 

I currently have an Emergency Fund of 6 months of expenses. 

Half is in an instant access savings account and half in a cash ISA.

Should it be kept in cash or should I consider moving it or half of it into a Short Term Money Market Fund, in order to generate a higher return?

Leaving any access issues aside:

Best easy access accounts (with no limitations) currently have rates around the 4.1 to 4.3% mark.

Royal London STMMF at the end of July had a yield to maturity of 4.35% (which is roughly the expected annual return if interest rates don't change) which will since have dropped a little. There will be a small deduction for fund fees (0.1% for RL) and possibly platform fees too. One possible advantage is that you don't have to keep moving the STMFF from account to account to get the best rates (from another pov that might be considered a disadvantage).

In other words, the interest gained is going to be similar.

FWIW, we use both easy access accounts and STMMF to hold money that we might need in the next 6 months or so, but mainly for convenience in the case of the STMMF.

boingy

Funds are slower to access than savings accounts but for a 6 month emergency fund you only need instant access to a few weeks worth of money to tide you over while you withdraw the rest of it.

Cisco001

flexible cash isa