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Emergency Savings – where should they be?

Emergency Savings are there so that if the worse happens, you’re ready. It feels great and avoids your financial dreams from taking a serious diversion. But where’s best to keep your emergency fund? There are two main options (and a ‘wild card’).

However, it can be confusing as Emergency Savings needs to be readily available, yet you don’t want to miss out on growth opportunities. Ultimately, it’s a balance between…

Accessibility vs. Performance

What are Emergency Savings?

Emergency Savings are a readily available account with funds specifically set aside for a personal finance crisis.

For that reason, they are one of the pillars of personal finance. By being prepared for unforeseen circumstances without needing to rely on a line of credit with associated interest charges, they give you stability and peace of mind.

Crucially, the minimum base-level of Emergency Savings should be prioritised over and above investing or even paying off debt.

Learn more: How much Emergency Fund do I need?

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

Emergency Savings need to be readily available

The basic premise of Emergency Savings is that it’s a pot of money that can be used for emergencies. And the nature of emergencies is that they bite. They usually bite hard and they bite fast. They can be upon you before you know it.

Therefore, it is important that you can access your Emergency Savings as quickly as possible. If something big is broken, it’s usually important to you, and being without it will likely have some form of negative impact. If you’ve lost your job at zero notice, how will you pay important bills and put food on the table?

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The two best places to store your Emergency Savings

Fundamentally, where to store your Emergency Savings is a question of balancing performance vs. accessibility.  It also needs to be tailored to your individual circumstances. You need to balance being able to get at your money quickly and easily without missing out on growth opportunities.

There are two main places to consider:

1. Instant access/low-performance accounts.

2. Delayed access/higher-performance accounts.

Storing emergency funds is about balancing accessibility vs. performance

1. Instant access/low-performance accounts

Accessibility is an important aspect of Emergency Savings. For that reason, most people don’t want them locked away. Therefore, you could consider either a ‘high-interest’ savings accounts or cash ISA.

Many accounts are instant access, but can also come with conditions. Make sure to check the detail, as some only offer one or two withdrawals a year before the ‘high’ interest rate is lost. However, you may not care about this in an emergency, particularly if you are withdrawing all of the funds.

Remember, even the ‘high’ interest rates currently are lower than the rate of inflation. That means that over time, the value of your money is actually reducing.

For example, your £1,000 saved today, won’t buy you £1,000 worth of the same stuff in five years’ time. You’re going to have to keep topping it up.

Lastly, if you withdraw from a cash ISA and have used your full allowance, you cannot put that money back in during the same financial year.

Account recommendations

We’ve found two good accounts that would work well for storing Emergency Savings in this scenario:

1. Marcus bankstill offers some of the best savings rates out there for both easy access and fixed term. Check out the Marcus review.

2. Chip app – uses Artificial Intelligence to maximise your savings rate and offers market-beating interest rates. Check out the full review and exclusive VIP account invite here.

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2. Fixed term/higher-performance accounts

On the flip side, your Emergency Savings could be kept in an account that is higher performing. We use the words ‘high performing’ loosely here. Generally, interest rates are currently so low that the rates on offer from even fixed-term accounts make only a marginal difference.

Fixed-term savings accounts will typically lock your money away for one or two years and sometimes more. For that reason, they kind of defeat the point of Emergency Savings that need to be accessed quickly.

Alternatively then, you may consider a Stocks and Shares ISA investment wrapper. In this case, you would be investing your money in the stock market.

The good news is that returns are typically far higher. If you assume an average return of 8% over the long term, this will likely outperform current inflation.

On the downside, it usually takes a few weeks to withdraw your funds. So, you’d have to have a plan if you need quick cash in the meantime.

In addition, the stock market, by its nature, is volatile. As a result, when the time comes and you need the money, you may actually have less than what you originally put in.

Most investors in stocks and shares are looking to hold for at least five years and for that reason, it is not commonplace to store Emergency Savings here (except for where credit it used – see next section).

Using credit for Emergency Savings

This is the wildcard and an area that is hotly debated in the personal finance community; do you actually need your emergency fund as real money?

Could it, in fact, simply be a line of credit? Personal finance guru and blogger Big Ern writes a compelling case for this in his infamous blog series.

Could your emergency fund be a £5,000 limit on a credit card? Possibly, though you need to proceed with caution and it depends on two important factors.

Do you actually have the money?

Do you actually have the £5,000 somewhere else, such as a Stocks and Shares ISA, that can be accessed to pay off the full credit card balance?

If so, then the credit card can be a valid way of temporarily accessing money. It acts as a stop-gap whilst you draw down your Emergency Savings that are tied up in a higher-performing account.

Do you have the discipline?

You must have the self-control to pay that credit balance off in full ASAP. Can you resist the temptation not to splurge on that easy, open line of credit and ‘pay it off tomorrow’?

If you’ve had an unhealthy relationship with money or are in recovery, then this may not be the route for you.

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Emergency Savings are about being able to get at readily available cash in a personal financial crisis. Where you keep them is down to your individual circumstances, just remember they’re there to get you out of a hole and quickly.

If you still have questions, please come join our supportive UK Personal Finance club on Facebook. You will find other like-minded individuals. It’s a safe, private community where you can ask questions and learn more about making the most of your money. Best of all, it’s free! I’d love to see you there.

Here’s to your Financial Fitness does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.