With an Emergency Fund you need instant access to your savings but at the same time you want to make your money work for you. Is it best in a savings account or NS&I Premium Bonds?
This may seem a little like deja vu. But I am going to look at my Emergency Saving pot strategy and whether with the change in interest rates if my plan should change.
In the past I went through why I kept my Emergency Fund in NS&I Premium Bonds. The full post is linked here but ultimately it (was?) for a few reasons.
1/ The interest rates were so low keeping it in a “high” yield interest rate account didn’t yield much interest
2/ The excitement of the monthly draw on winning something big was my lottery ticket excitement.
3/ It was secure. Unlike putting it into equities.
Over the past few months I have been really lucky with the premium bonds monthly prize. I won £25 in both December 2022 and January 2023 and then most recently in March 2023 I won £100. Following the statistics on this happening it’s really unlikely given the fact between these dates I only held £5000 of bonds.
Last year I made a point that me winning £25 on the 12th month of owning my bonds made it all worth while as it was significantly more than the low interest saving accounts on offer, and I was happy my plan worked out.
However as the interest rates are changing, should I change my strategy?
There will be two factors at play here to sway my decision. Firstly the maths behind the known return of a savings account, and secondly the excitement of the what-ifs of winning a big prize .
Let’s look at the best easy access savings account. I need access to this money fairly easy. Waiting for a few days for the funds to become available is fine, but locking it away for a few years is not an option.
On Money Saving Expert website it has the highest easy access account at 3.4% through a company call Chip. Nope never heard of them either…
Looking at HSBC and Santander who I have accounts with, I can see they have 1.20% and 1.50% rates which are just awful.
With my initial deposit of £5000 and then contributing £100 per month in I would make the following on interest:
Chip = £191.55
HSBC = £66.95
Santander = £83.80
If I then use this calculator to work out the likelihood of me winning on the Premium Bonds with the amount I have in now, and then for example with the £5600 I'd hold in the account 6 months time I would within a year as a median average win £125 - but of course it could be less.
Mathematically then it is clear the obvious winner here is to move my money to Chip and enjoy the likely higher returns rate.
But this is where emotion comes into play. I love stats and will happily make decisions based on what the evidence or probability shows me. It’s for this reason I do not day trade and instead just stick it all in an index tracker. The evidence has shown it’s not worth day trading.
However. For me the known risk here is losing roughly £60 of interest with the potential of winning up to £1million. Hell, I would be happy with even the smaller prizes of £1000!
This month before I won £100 I was excited waiting for the email to see if I had or had not won. A lot of my finances are all so automated and vanilla its nice to have a little excitement there with the potential of winning big.
Although planning ahead for when I have my Emergency Fund total of £10,000 which would give roughly £340 annual interest this could be enough to sway me away from keeping my Premium Bonds. Although with the likelihood of winning also increased I’d still want the excitement each month of winning a big amount.
I don’t currently do any sports betting or lotto syndicates. If I started perhaps my mindset would change on where I keep my Emergency fund. For now however I will keep it where it is and enjoy the monthly chance of winning some decent cash which would change the trajectory of my financial journey.
What do you do with your Emergency Fund?
Has it changed at all with the increase in interest rates?
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