Ask HN: How do you protect your emergency fund from inflation? So far inflation in Europe has risen to 5%, and many think that it will raise even more. Naturally, the question comes on how to protect any savings that are not being intended for investing, but rather for a rainy day, from inflation. Banks (at least in EU) offer a much smaller interest rate for locking funds for a predetermined amount of time. What are the alternatives? |
Higher yields are possible with various different investments but they all come with additional risk. You do not want to have an emergency fund they may drop in value during a period which you may need to draw on your emergency fund, such as a market downturn that leaves you unemployed.
Similarly, you want to be able to access emergencies funds quickly. Emergencies are generally unexpected. If you need to wait for funds to unlock or for sales to settle, then it could possibly be too late.
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This, this, this and THIS !
Emergency funds = cash = it goes into a boring bank account.
Full stop. No arguments.
If you have to "sell" or "close" something in order to get it, it is NOT emergency funds.
If there are conditions on your access to it, e.g. "n Day Access" then it is NOT emergency funds.
Your emergency funds are sacrosanct. Put them in the most boring bank account with the most boring bank you can find, maybe with two banks just to be safe (if you live in the UK, put it with NS&I where the account is 100% guaranteed by the government, i.e. over and above the £85k guarantee that is available with normal banks).
If you have spare cash sloshing around after you have put a decent chunk aside in your emergency accounts, then you can invest / chase interest rates with that. But DO NOT mess around with your emergency funds.
In the US it makes sense for medical bills or a broken car or something but in a country with sane healthcare and public transit, I'm having trouble thinking of anything.
I also live in the PNW, which is way overdue for a >9.0 earthquake. I keep some cash in a safe at home because it could be a week (or more) before phone systems are up and working again for things like gas stations, etc.
There's also natural disasters or unexpected maintenance, appliances dying, roof/plumbing leaking, etc.
In general though, i think for most EU countries a few thousand euros is enough of an emergency fund, depending on circumstances of course.
Other examples:
- car transmission fails at a crucial time such as during travel (now you may need accommodation)
- boiler breaks
- AC failures during summer
Really any major house related or car related issue. You could argue that these are maintenance costs and not emergencies and I would agree, but not everyone approaches these the same. It is also entirely possible for several affordable and expected events to unexpectedly happen at the same time.
getting across a border to a country that isn’t shelling its neighbor, without access to an ATM because they’ve been frozen.
there are a few cases where “hundred dollar bills stuffed in the mattress” is actually the way to go!
In that case, I do not believe there's any options that are better than a savings account in terms of reduced risk and immediate availability of the money when needed.
In theory, you could say that a higher return is the risk premium you demand. Turning that around, higher returns means the product is more risky, and thus a bad fit for an emergency fund. Even with inflation a lot lower in the past years, a savings account still didn't exceed inflation in terms of return.
Traditionally, stocks have been a good hedge against inflation, but especially in the current market there's a lot of volatility which is not a good fit for emergency funds.
I have personally reduced my emergency fund to a level I'm still comfortable with, with the rest of my savings in investments. And frankly, my emergency fund is just a small part of my total net worth, it's OK if that part loses some purchasing power over time because it's optimized for other goals, like immediate availability, and a more predictable loss of value over time.
Stocks are not a good option obviously. Current situation is a testament of that. We can see the situation in Russia now where the stock market itself is shutdown (obviously these are exceptional circumstances) but people loose total control over their investments for unknown period of time.
Not a CPA but got told this advice with regard to larger savings. If the bank has trouble it can snatch up your redraw. YMMV
It's sort of like worrying about how living in an apartment building I will probably be incinerated by a nuclear blast hitting my city whereas I could live long enough to witness the end all life if I had a house a few suburbs out. If nuke hits Melbourne it's all over red rover, if Commbank goes tits up it's basically the same thing from a finance POV.
That said, these troubling times are even more riskier to invest. Perhaps, the best you could do is to prepare for potential supply chain issues with gasoline, LPG, etc.
I happen to stay in Sri Lanka nowadays, where the inflation crossed 16%, and the there are many issues with lack of essentials. Supermarkets don't sell more than 5kg of sugar, me having to drive 20km because the three gas stations I drove past didn't have petrol, and soaring prices of pretty much everything.
I thought to stock up the essentials to last a couple months or so, expecting the imminent worse conditions.
In Europe, though, I don't think things to get this extreme, but my suggestion would he to stock up. Not hoarding piles of toilet paper, but make sure to have a reserve can of petrol, extra medicine, and the essentials to last a month or two. Food prices went up about 20% in just last month here, and that annualized return of 240% I'd much better than the appreciation of gold, real estate, stocks, etc.
I think the advice also depends on your own personal scenario. In my case - I have to save extra money on top of 401k, Roth IRA, etc. in order to retire. (Social security plus that isn’t anywhere near enough) So, can use that brokerage account as an emergency fund as well. Which is more or less what I do now, tbh. The assets are all mixed. It’s mostly irrelevant.
I still keep 20k cash in my account but I try to not keep more. (Sometimes I have $10k bills in a month or what not - like having the buffer and like being able to divest an entire month or two of paychecks to just do all 401k in that time)
I can recommend to anybody who ownes stocks to ask your bank about such a line of credit, because it has no costs as long as you do not need the credit, but if you need money you can immediately draw a flexible amount of cash for exactly the time you need it.
I created an account this week with https://beta.getquantbase.com/
I have not invested yet...
I think younger folk or those in a less financially secure position could be better off holding cash rather than investing their fund, but those people will also have more frequent use of an emergency fund (i.e. an emergency to a young person could be significant car repairs of $1500 where someone who's 25 years into their career could more likely take that in their stride)
So basically, my cop-out is "it depends" but as a rule of thumb, stocks are normally ok during inflation as you are owning a slice of the economy that is undergoing inflation.
The best security against economic changes is to try to keep a large gap between spending and earning; I think the question of "where to put your rainy day fund" is then less relevant.
EDIT: I should also add that depending on your region (especially in Europe) there can be serious tax implications if you take it out all at once.
On the other hand your emergency fund needs to be a lot smaller, because of social support provided by the society. If you are unemployed and break a leg, you aren't going to need to pay a $20,000 hospital bill.
In the 70s you'd have lost 30% of your money in adjusted terms if you put your money in a tracker.
Everything that is not an emergency fund is in stocks/etfs.
Do your research on which is the best yielding. In Australia, at least when I last checked, it's LFSPA.
Obviously these must have gotten more expensive since inflation rose. But it will protect you against higher inflation. You'll lose in case of deflation/lower inflation.
Be sure you understand the product before getting into it.
Probably not the solution you are looking for, but it should work...
Otherwise, I don't know.
To be honest I am seriously considering a move to say South America. Even if we don't end up in a hot war, the persepectives for freedom in Europe are very bleak.
Good example of cheap talk / revealed preferences. Don't bother with this comment until you have actually moved.
There are very few stocks that will keep up with high inflation. These are for companies whose valuation is mostly based on the properties they posess, such as e.g. real estate.
Emergency fund should be approx 6 months salary, both easily accessible AND reliable. With the amount of apps refusing to serve customers money and crypto nutjobs manipulating the market, BTC is neither.
I'm in the UK, so I have a 50/50 split between a regular bank account and premium bonds. Once I hit that 6 month salary between the two, it's a split (80/20 as I'm younger and more risk tolerant) of whatever I have leftover every month between a global index fund, and UK GILTs.
Simple, no worries, and basically everything I've seen reccomended since the 1950's.
Also, many of them have serious problems with crime. Depending on what freedom means for you, and the importance of economic stability, i don't think South America is a good idea.
But if the primary purpose of the emergency fund is to smooth things out if you lose your job, that's literally the moment the bank will get cold feet about lending you money it's not contractually obligated to.
If the economic trouble causing your job loss coincides with a drop in house prices and all of a sudden you're underwater, it's hard to imagine a clause like that not being triggered, should it exist.
If inflation eats your emergency fund then you increase the size of your emergency fund to compensate for it.
It's kinda like paying for IT security; with luck it'll just be a cost that you never see any benefit from. If not, you'll be glad you have them.
Do as you say and you’ll find yourself the target of a gang retaliation. You plan on packing automatic weapons? You going to kill ten people? Even if you do it in self defense, you’ll get killed in jail while awaiting trial.