Should I invest my emergency fund? | Summer Series

Bryce: [00:00:40] Welcome to the Get Started Investing Summer series over six episodes. We're going through six steps to help you set up your finances for 2023 from budgeting and savings habits, emergency funds and superannuation through to common mistakes and how to set up the ultimate core portfolio. This series will have something for everyone. While we are licenced, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes only, and any advice is general advice only. With that said, my name is Bryce and as always, I'm joined by my equity buddy, Ren.

Alec: [00:01:11] How are you? I'm very good, Bryce. I am glad to be back. Episode two of our Get Started Investing Summer Series. We're going back to basics because wherever you are in your investing journey, there's at least one monthly subscription you can cancel. 

Bryce: [00:01:24] If that's going to be the tie in across all six episodes. Yes, there is always something to learn when it comes to managing your money, Ren. In the last episode we talked about getting your money sorted. We mentioned emergency fund a number of times, so this episode we are dedicating to the emergency fund.

Alec: [00:01:40] Yeah, because I think a lot of people have an idea of what it is, but I think really where the rubber hits the road is what do you do with it once you have it? And I think we want to spend a bit of time there. Do you invest it? Do you put it in a term deposit bonds, high interest savings accounts? Is there such a thing as high saving interest savings accounts in 2023? Anyway, so I think that's that's really what we want to talk about, why you need an emergency fund, how much you should put in, and then what you're going to do with it. So, Bryce, let's start at the beginning. What is it? Why do we need it? 

Bryce: [00:02:14] An emergency fund is a pool of money that you have saved for that covers your expenses should an emergency occur. In other words, if you lose your job, there's a pool of money sitting there that allows you to continue living without having to take out debt. I think that's an important part of an emergency fund. You're not going to be forced into using credit cards and taking out debt. In other words, if you lose income, you have something to support that while you find income somewhere else. That was super confusing. That was. 

Alec: [00:02:46] Super confusing. But all the elements were there. So it's it's money that's easily accessible if something goes wrong. 

Bryce: [00:02:56] Yeah. 

Alec: [00:02:56] And Bryce will sometimes see headlines in the media about how few people can cover an unexpected expense. And that's where the emergency fund is really important. We've pulled some of those headlines. You've pulled some headlines from the US. I pulled some from Australia. So Budget Direct did a survey and found 54% of respondents couldn't cover unexpected $1,000 emergency. So less than half of Australians could come up with $1,000. And Commonwealth Bank has done a survey and found that one in three Australians couldn't come up with $500 in an emergency. Wow. Which is pretty stark. What about the US? 

Bryce: [00:03:36] The US is similar, so they have the 400 emergency expense. $400, $400 emergency expense rule, which is actually run by the Federal Reserve over there in ACA. They ask, could you cover a $400 emergency expense? 68% of adults said that they're living paycheque to paycheque and would struggle to cover. The 401 in nine said that they just flat out couldn't do it at all. Yeah, with a lot of them noting that they would have to put it onto a credit card to pay off the expense.

Alec: [00:04:06] And so for so many people, that's the reality. But wherever you are in your financial journey, it's important you're thinking about an emergency fund and taking those small steps to build it up, because there's nothing that can set you back further than having to put $1,000 on a credit card to cover an emergency expense.

Bryce: [00:04:26] Absolutely. 

Alec: [00:04:27] So even if it means that you start building it and you only have to put 500 on a credit card, that is still you're in a much better situation. 

Bryce: [00:04:34] Yeah, I'm going to be honest, I found this one of the hardest parts of setting up my finances when I was back at uni and thinking about doing something like this, because it's one of those accounts that you're constantly putting money into and you you know why you're doing it, but you hope you never have to use it. But you're also sitting there going, Oh my gosh, what I could do with that money. Yeah. And so it's just such a mentally difficult thing to be intentional with setting it up. You know why you're doing it. You know that if you ever need it, it's going to be great that you've done it. But. Paycheque after paycheque. Putting something in there was a really hard thing to. To sort of overcome. I guess so. Yeah. Yeah. I can understand why a lot of people might just say I'm going to focus on other things and not build the emergency thing. 

Alec: [00:05:20] So that's what it is. How much should we put in? 

Bryce: [00:05:24] So general rule of thumb is to have three months worth worth of your expenses covered.

Alec: [00:05:29] Yeah, that's minimum. Yeah. Then they say you should try and get it up to six. Don't know. 

Bryce: [00:05:34] 3 to 6. Six would be amazing. You'd be absolutely not shooting the. Lights out. 

Alec: [00:05:39] Yeah. Yeah. You have a lot of cash on the side. 

Bryce: [00:05:41] You'd have a lot of cash on the sideline. So three months minimum is generally rule of thumb. And that's so that you can you get sick, you have a kid, whatever it may be. 

Alec: [00:05:51] I think the key thing is you lose. 

Bryce: [00:05:53] Your job, you lose your. 

Alec: [00:05:53] Job. You self a buffer to find a new job. 

Bryce: [00:05:55] Yeah. If you only have four weeks, you're under the pump from the get go, you're under the pump. And for people with, I guess, inconsistent income freelancers, people who own media businesses, podcasters, casual part timers, those people, it's it's worth probably having a little extra buffer. 

Alec: [00:06:15] Yeah. Which is sometimes difficult because people who have the most insecure work often find it the hardest to build this emergency fund. But it just it is more critical because the likelihood that you lose work is higher if it's insecure. 

Bryce: [00:06:29] So that's why we need it and how much it should be. After the break, we're going to actually turn to the nuts and bolts, what we do with that cash, because it can be a fair chunk and there are definitely things you can do with it. So we'll take a quick break and we'll be back. All right, Ren. You've saved your emergency account. You've got the pool of money. The question is, what are we doing with it? 

Alec: [00:06:48] There's a couple of key criteria that you need to tick when you're thinking about an emergency fund. Number one, most important, it's easily accessible. Yeah. And that literally means, you know, same day or a day or two. Lose your job suddenly and you have to suddenly cover your own expenses or your car breaks down and you need to get it fixed quickly, whatever it is easily accessible. Second of all, low risk. There could be nothing worse than you putting in in the share market. And then a recession happens. You lose your job, and your emergency fund has been cut in half at the same time because the stock market's fallen not good. So there probably ought to be criteria for me, any other ones for you. 

Bryce: [00:07:26] Know, I think that that's perfect. Accessible, low risk. My my third one would be out of sight.

Alec: [00:07:33] Oh, yeah. That's good. Yeah, yeah, yeah. 

Bryce: [00:07:35] If you can get it out of your Internet banking, you literally can't see it. Yeah. Even better. 

Alec: [00:07:40] Because there's it doesn't. 

Bryce: [00:07:41] Don't have it in your spreadsheets.

Alec: [00:07:42] Because there's an inherent tension there between I want it out of sight so I can't transfer into my spending account willy nilly, but I need it easily accessible so I can transfer it into my transaction account quickly if I do need it. So just keeping out of sight is a good way to think about it.

Bryce: [00:07:58] Yeah. Out of sight.

Alec: [00:08:00] Yeah. Then the fourth thing is, because it's in cash, you want it to beat inflation? 

Bryce: [00:08:05] Yes. Yes. 

Alec: [00:08:06] So you need to be you you want to be you don't want to stuff your emergency fund under a mattress because the value of your money erodes year after year. So you want it to be somewhere where you at least your purchasing power remains the same. 

Bryce: [00:08:19] And a caveat on that in these inflationary times, we're probably going to go through some accounts which aren't doing that at the moment. 

Alec: [00:08:26] I've pulled out my worst savings account of 2022. 

Bryce: [00:08:30] Okay. So I think it's important to realise that, you know, there are some circumstances where reducing risk and having something that's accessible and liquid is probably more important than beating inflation, because otherwise you'd have to take other products into account. 

Alec: [00:08:43] Hmm. So that there are a few like alternative investment options that are very short term commercial paper, blah, blah, blah. But I think for the sake of this and to speak to my experience and I'm going to hazard a guess of your experience, high interest savings accounts are the way to go. The stock market, you can access the money quickly, but it's risky. A term deposit, not risky but not accessible. 

Bryce: [00:09:08] Can break it. Just costs. But. Yeah, true. 

Alec: [00:09:10] That's not bad. Yeah. But for me, the way I've set it up is high interest saving account. What about you? 

Bryce: [00:09:16] It's not actually in high interest. It's in a peer to peer lending, which is up the risk curve compared compared to a cash account. [00:09:24][8.0]

Alec: [00:09:24] How accessible. 

Bryce: [00:09:25] Is. It's very accessible. Very accessible. I can pull it out at any time I want. 

Alec: [00:09:29] Okay. 

Bryce: [00:09:29] So it's accessible. It is it is more risky than a high interest savings. But the reason I did it at the time was because of the inflation pace. It was giving me interest rates higher than inflation. But now it's all kind of evened out and it makes more sense. I've also just got married and joining emergency accounts with Harriet. So now we've got a joint emergency account because at the end of the day, if she gets sick. If I get sick, it's all the it's all the same. So. 

Alec: [00:09:54] So Harriet's talked you back into reality. 

Bryce: [00:09:57] We're back to it. We'll be back to a high interest savings account. Yeah. Out of sight, though. 

Alec: [00:10:01] Yes. Okay. So high interest saving account is really what we're going to talk about here. We have had a look at canstar saving scheme today. You mozo and finder for comparison. Websites will include all four links in the show notes. And what we've tried to do is pull out some of the best savings accounts with bonus and features. But you've got to remember that sometimes those bonuses go away, sometimes they're a bit gimmicky. So we've also looked at the best we could find just based on standard, right? And then I've pulled out the worst savings account I found where. 

Bryce: [00:10:37] You don't want to go. All right, well, let's kick off with the those that are on the more positive side. And this is as of December 2022. And we'll start with those bonus feature accounts. 

Alec: [00:10:47] And I think we should say this is by no means exhaustive. No. Yeah. 

Bryce: [00:10:51] The main thing is to get on those websites you mentioned Ren kannst of mozo savings dot com and have a look also. 

Alec: [00:10:57] So you said you go to I and J. Yeah. What's their interest rate? 

Bryce: [00:11:00] 3.75. 

Alec: [00:11:01] Okay, that's in the ballpark. Oh, is that bonus or standard. 

Bryce: [00:11:04] Standard. Oh that's like 4.3 I think. 

Alec: [00:11:07] Is a bonus. Okay. That's actually that, that should be on this list. It should be so considered on the list. 

Bryce: [00:11:14] No, it's on the list. So the first is Bank of Queensland Future Saving Account. I used to work at Bank of Queensland and they always had good bonus accounts. Its rate is 4.75%, but with all bonus accounts you must match certain criteria. So you must deposit $1,000 per month and make five eligible transactions. 

Alec: [00:11:35] With a lot of these accounts, it's like there's a savings account and then a linked transaction account and you get the bonus interest on a savings account. If you do the transactions. So to make put $1,000 a month in the transaction account, make five eligible. 

Bryce: [00:11:49] Transactions. 

Alec: [00:11:50] In the transaction account to double, and then you get the bonus interest rate.

Bryce: [00:11:53] On the savings. Yes. 

Alec: [00:11:54] Now, you also have to be between 14 and 35 years old. Yes. So Bryce, let's say one month I only make four eligible transactions. I don't get my 4.75% interest. 

Bryce: [00:12:05] No. When you get stung with 0.05%. Yes. 

Alec: [00:12:11] So that is the watch out. 

Bryce: [00:12:12] Yes, that is the watch out with a lot of these accounts. You must meet the minimum thresholds in order to get the 4.75%. 

Alec: [00:12:20] And so because we're saying put this high interest account out of sight, is it realistic to have the transaction and the savings account in the same up? And if it's not like this, you've got to be very clear eyed about how you're going to manage your money because you don't want to be like, I'm going to get 4.75 and then half the year only get 0.05.

Bryce: [00:12:41] Yeah, exactly. Exactly. Second is the Virgin Money Boost saver. It's at 4.3%. But here again, you must deposit at least $2,000 into your linked Virgin transaction account each month and make five plus transactions. If you don't, again, you're only going to get 0.05% and you have to be older than 25 years of age.

Alec: [00:13:04] I just found that interesting that Bank of Queensland, you have to be between 14 and 35 so that they're taking the whole lifetime customer value, get them young and then we'll keep them and we'll cross-sell them into our other products. But then Virgin Money Boost Saver, you have to be 25 years or older.

Bryce: [00:13:19] Yeah, maybe they're just saying 2000 needs to go in each month. Likelihood of that. People posting any. I don't know. I'm just guessing. 

Alec: [00:13:27] Yeah, but don't they make their money by selling the dream of 4.3 and then only paying out 0.05 cynically. That's yeah. 

Bryce: [00:13:35] And anyway, let's keep going. So those were your bonus. But as you said, Ren there there are a lot of conditions with those. And if if you're looking for an emergency, can't we just putting money in and just leaving it? You don't, you don't want to have to be meeting certain criteria. Yeah. 

Alec: [00:13:48] And I think especially because a lot of people will be like, you know, Commonwealth Bank have a if you put a certain amount in the savings account, you don't have to spend, just put it in a savings account every month. But realistically, the way you're going to manage your emergency fund is you'll get it to a certain level and then you can stop topping it up. Exactly. And then, like if you get married or you have kids and your expenses increase, you'll then have to put more in. But it's not like you're going to be consistently putting 200 bucks a month in or anything like that. So I think realistically, these standard rate accounts probably make the most sense depending on your personal circumstance. 

Bryce: [00:14:21] Yeah. So the first is the ANZ plus it's standard rate, 3.5%, it is exclusive to the ANZ Plus app but. 

Alec: [00:14:29] Had no idea what that meant. 

Bryce: [00:14:30] That's just yeah, it's just the app. 

Alec: [00:14:32] You have to sign up thrown out rather than a website. Yeah. 

Bryce: [00:14:34] They do a lot of their promos through app now. Okay. I have the app. 

Alec: [00:14:39] Must be. 

Bryce: [00:14:40] Macquarie Macquarie savings account really pushing into the retail market which is 3.4 or 5%. They have an intro rate of 4.25% for the first four months for new customers. And we should throw in there the IAG and then also Rabobank at 3%. So there are options out there I think with these rand as well. And this is also why I actually have a number of different bank accounts because I used to shop around quite hard on this stuff. There is no reason and it's so easy to sign up online these days, particularly for online only like on J that you don't have to go into a branch or anything if you've got a lump sum that you want to put somewhere and someone is offering an intro rate of 4.25% for four months and then three and a half. There is nothing wrong with it. 

Alec: [00:15:23] You assigning the introductory rate and then roll it into a new account. 

Bryce: [00:15:26] Well, no, I'm just saying like. Yeah, shop around. You don't have to stay with the same bank. 

Alec: [00:15:31] And the key call out with all of these savings accounts. They shouldn't have fees, but if they do, you have to calculate that because if they offer you 7% interest, but they charge you 4% in phase net, you're only getting 3% interest. 

Bryce: [00:15:47] Yeah, exactly. 

Alec: [00:15:47] I wouldn't expect savings accounts to have phases. 

Bryce: [00:15:50] Does some of the old school legacy banks in accounts had like account management, FE, etc., etc.? But you're right, it's more like the cash management accounts and those sort of accounts that are linked to home loans. 

Alec: [00:16:02] Yeah, yeah, yeah. So definitely keep an eye out for that. With all of the stuff we talk about, fees matter. So there are a few examples and we need to do we do need to stress they are just some examples. The list is by no means exhaustive. Have a look at those links. But Bryce, I have to tell you, the one that I came across and I don't mean to single them out, but I do. 

Bryce: [00:16:24] What is it? 

Alec: [00:16:24] Australian unity easy saver? For the first four months you get an introductory rate of 3.8%. Okay, pretty good. Yeah. After those four months, it drops to 0.01%. 

Bryce: [00:16:38] I mean, wow, what's the point? Easy. Saving nothing is what it should be called. Yeah, well, I think the final piece here before we get to our three actions, Ren, is that it's clear from these numbers that you're not beating inflation as it currently stands in Australia. But the key, I think the more important thing to realise is that it does tick the box of accessibility, it ticks the box of low risk, which at the end of the day is what you need for your savings account. And in my eyes I just have to cop that one part of my money journey is not going to beat inflation. 

Alec: [00:17:15] Inflation isn't going to stay at 6%.

Bryce: [00:17:17] But that's my point. 

Alec: [00:17:17] 2020 was an outlier. 

Bryce: [00:17:19] Yeah, that's my point. Like, if you're doing this now, it's just. It is what it is. Yeah. Like, you're not, you're not going to find an account that's going to beat inflation at the moment. 

Alec: [00:17:27] So no. And the point of this is to protect yourself in the case of emergencies. Yeah, to the extent that you don't pay inflation in the year like 2022, that doesn't override the job to be done, which is if something goes wrong, there's money there to help you. Yeah. Use your stock market investments, which we will get to use your property investments which we hope one day to get to, to beat inflation.

Bryce: [00:17:52] Exactly. Alright, three key actions to close out Ren. 

Alec: [00:17:55] First of all, calculate your monthly expenses and be realistic about your monthly expenses. Multiply it by three. That's your target. You don't have to have it on day one, but that's the number you want to be working towards in your emergency fund. 

Bryce: [00:18:09] Number two is do some due diligence on your current bank account and find out what your current savings interest rates are and if there's any conditions that you need to do to be getting those and shop around. 

Alec: [00:18:21] And then number three, in the spirit of shop around, check out one of the links to the comparison tools in the show notes and see what else is out there. 

Bryce: [00:18:30] And if you're not signed up to our get started investing weekly email, make sure you jump to our website EquityMates.com to sign up because each episode is going to have an accompanying write up on some of the key pieces of information, links, resources to build on what we've discussed in this episode. So head to EquityMates.com to sign up. Nice renewal. Next episode we are talking about seven steps to supercharge your superannuation, so we're going to pick it up then. 

Alec: [00:18:54] It sounds good.