Where to stash your emergency fund
You’re a savvy saver with an emergency fund. Well done! But what’s of more value — a higher return or easier access?
One of the challenges of being a diligent saver and having a solid emergency fund is deciding where to put the emergency money. Even with rising rates, returns are generally low for cash. Where will you earn the best rate while paying the lowest tax — or no tax?
The reason tax is the first issue to consider is that interest is added to your income and is taxed accordingly. But the SA Revenue Service does offer an exemption. If you’re under 65, the first R23,800 of interest is excluded, while for those over 65 the exemption is R34,500. For most people under 65 and for whom savings really are just for emergencies, the R23,800 exemption is likely more than enough, and means they are not going to be taxed on any interest. But this also means that using a tax-free account is not a great idea, as they are not paying any tax anyway. Further, using that account for savings will affect their annual and lifetime limits.
After tax, the other important issue is what interest rate you can get. But you also have to consider how quickly you can get access to the money in an emergency.
For those with an access bond, placing your savings in the bond account is an attractive option, as it is easy and you essentially earn the interest rate of your bond. Importantly, you don’t actually receive the interest — rather, the outstanding bond amount is lowered due to the extra funds you have added. So if you pay the same amount every month you end up paying off the bond a little faster.
But be warned. During the early days of the pandemic (and in 2008, when global markets were collapsing) some banks withdrew the access portion of clients’ access bonds, leaving them unable to take out the extra money they had deposited there. This seems to happen very seldom, but it is within the bank’s rights and I know people to whom this happened.
If the access bond isn’t an option, a standard savings account and money market or income funds can be considered. Standard savings accounts are largely risk free (a bank default is the risk) while the other two have low risks, as they invest into bonds and cash on your behalf. The problem is that the rates are low. You can look to using lock-in periods, which may increase the rate — but they add risk if we need the money in a hurry.
One option here is to split the money into different buckets. How much of your emergency fund would you need immediately? Likely only a fifth, or even less. So this portion would need to be in an immediately available savings account. The balance can be split into 30-day and 90-day lock-in periods.
The key point is to remember that access is more important than return in an emergency fund.x