Should I move my emergency fund into government bonds at 5% yearly. Is this wise?
18 October 2021
Question by James
Hi, I’m a bit lost when it comes to what I should do with my emergency reserve fund. I’m thinking of moving it into government bonds at around 5% yearly. Is this wise or should I consider other options first? Any ideas would be great!
Answered by Boring Money
I would be more inclined to keep my emergency fund in savings. I appreciate that interests rates may feel really poor but the point of cash is to do a specific job; to be there when you need it, not to make you richer.
If you were to invest in government bonds, to be sure you don't suffer from a capital loss, you either have to do it directly and hold the bond to maturity (which means you either can't get your money when you need it, or you get back less than you put in). Or, you invest in a Government Bond fund which will be available at any time, but still has the chance of capital loss.
Government bonds also don't provide inflation protection, which I assume is implied in your question.
The general rule of thumb for the size of an emergency fund is to have 3-6 months of essential expenditure available to you. This could be through an instant access savings account or if you wanted slightly more interest a mix of instant access and notice accounts. Premium bonds are always worth considering because they are backed by HM Treasury and there is always the chance of winning large cash prizes (though in reality, annual prizes equivalent to an annual interest of 0.5% to 1% is more likely).
Remember too that interest rates are relative to inflation. You might remember when interest rates were around 4% pa but that was because inflation was 5%-6% pa. If the Bank of England feels that current inflation is getting too high they will raise interest rates which should feed through to higher savings rates, but also have a negative effect on the price of government bonds.
I hope this helps.