One of the foundations of good financial planning is to have an emergency fund. This is to cover any unexpected capital expenses or periods where income is less than it has been previously.

There is no magic number as to what this amount should be but I am often asked for a good place to keep these funds.

My first answer is usually Premium Bonds. Premium Bonds can be a good option for emergency funds for several reasons:

Liquidity

You can easily cash in Premium Bonds at any time without penalties, so they’re readily accessible when you need them but aren’t so accessible that you can access the funds instantly for those impulse purchases.

Safety

Premium Bonds are backed by the UK government, making them a very safe place for your money. This means your capital is secure, which is crucial for emergency funds.

Potential for Returns

Although the return isn’t guaranteed like traditional savings accounts, Premium Bonds offer the possibility of winning tax-free prizes. While this is a lottery-like feature and not a guaranteed income, some people appreciate the chance of getting extra returns. The NS&I website currently quotes an average return of 4.4% from Premium Bonds, whilst not exciting this is tax free and therefore the equivalent of 7.33% for a higher rate taxpayer.

No Interest Risk

Unlike savings accounts, where interest rates can fluctuate, the safety of your capital with Premium Bonds is not affected by changing interest rates. This stability can be reassuring.

Flexibility

You can reinvest or cash in your bonds at any time, which gives you flexibility to adjust your emergency fund as needed. Or if you like the occasional ‘bonus’ you can take the winnings as cash and enjoy a little treat here and there.

However, it’s worth noting that Premium Bonds might not always be the best option for everyone. They don’t offer interest, and your return depends on the luck of the draw. If you need a guaranteed return or a predictable interest rate, a high-interest savings account or a cash ISA might be more suitable. It’s always a good idea to compare options based on your individual needs and financial goals. Likewise, if long-term growth is your objective then again Premium Bonds may not be suitable.

Thanks for reading and #enjoythejourney