4. Where should you keep your emergency fund?
Your emergency fund needs to be kept in an account that is safe and easily accessible, where you
can withdraw funds quickly during an emergency. The focus should be on
liquidityLiquidity refers to how
quickly and easily you can access your money without losing value. rather
than high returns. Below are some of the best options for storing your emergency fund:
- Instant access savings accounts:
These accounts offer immediate access to your money without penalties for
withdrawals, making them a solid choice for emergency funds. Although the interest
rates are generally lower, the key advantage is flexibility - your money is always
available when you need it.
- Premium Bonds: While technically
not a savings account, premium bonds are a unique option where instead of earning
interest, you enter a monthly prize draw. The appeal is that your initial investment
is safe, and while the average return may be low, there's a chance to win tax-free
prizes. Premium bonds are also easy to cash in, typically without penalties or long
delays, making them a viable option for some emergency funds if you're comfortable
with lower predictable returns but higher potential rewards.
- Money-market funds: These accounts
offer a balance between the safety of a savings account and the flexibility of an
instant-access account. They often come with competitive interest rates and may
provide limited check-writing abilities. Money market funds provide liquidity along
with slightly higher returns than traditional savings accounts.
Choosing the right option for your emergency fund depends on your preference for safety,
accessibility, and potential for modest returns. Prioritising liquidity is essential, as
these funds need to be available on short notice without risk or penalties.