Ask HN: How do you protect your emergency fund from inflation?

[yololol]

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?

[Shatnerz]

You don't. Emergency funds are for emergencies.

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.

[traceroute66]

> You don't. Emergency funds are for emergencies.

^^^^

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.

[Youden]

Honest question: unless you're American, what kind of emergency could require a large volume of cash in less than a week?

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.

[briffle]

I keep about $500 in small bills hidden I’m my car. I have been on road trips where I have had car trouble, and the small town mechanic nearby only takes cash or local checks. When it happened, I had to get a ride to an ATM with an huge fee.

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.

[sofixa]

Even in such countries one could rely on a car. Some medical things aren't covered fully or require prepayment to be reimbursed later ( e.g. dental or glasses, but we're talking a couple od hundred euros max, not tens of thousands).

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.

[Shatnerz]

A meteorite strikes your house and puts a hole in your roof in the middle of rainy season. You will likely need cash quickly. You may be able to get an invoice or payment plan, but a lot of workers who will patch your roof get ripped off and demand cash up front as a result.

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.

[hprotagonist]

getting across a border to a country that isn’t getting shelled, without access to an ATM because they’re in pieces.

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!

[2000UltraDeluxe]

This. Some money on a regular savings account, and some more as cash.

[luciusdomitius]

Regular savings account offers interest 5-6 percent below even paper inflation. How is this advice on-topic, when OP is asking how to AVOID EXACTLY THIS??

[unmole]

The advice is perfectly on topic because OP's fundamental premise is wrong.

[2000UltraDeluxe]

The thing is that you can't protect your emergency funds against inflation. The point of emergency funds is that you have them readily available -- not to invest them.

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.

[Bhurn00985]

When you say emergency fund, I expect you want as little investment risk as possible.

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.

[siddharthgoel88]

I personally keep it as FD ( https://en.wikipedia.org/wiki/Fixed_deposit ) in different reputed banks. Might sound a bit extreme to divide money into multiple banks but during mid of 2020 in India one of the major banks had stopped its customers from withdrawl of money for period of time (https://www.businesstoday.in/industry/banks/story/yes-bank-c...). 2020 was already an year of crisis and such kind of limitation by the banks had created a lot of problems for the people.

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.

[jpgvm]

Best spot for actual emergency fund if you have a mortgage is in said mortgage redraw account. Most mortgages these days have free online redraw so it offsets the interest you are paying while being completely safe with zero risk and only your local currency volatility.

[gonzo41]

Check your loan conditions, your bank may have rights to money in excess of scheduled payments. Unless your talking about a specific offset account as opposed to the actual loan account.

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

[jpgvm]

If my bank is having trouble (by far the largest in my country) I'm beyond fucked and I don't think it will matter much how much of my paid-in-advance funds they can take.

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.

[reitzensteinm]

You're probably right you don't have to worry too much about the bank going bankrupt.

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.

[pawelkobojek]

My emergency fund is set for 12 months. I keep 1/4 in a savings account for a quick access and 3/4 in government retail bonds which in my country (Poland) are inflation adjusted after first year and I’m able to withdraw any time I wish so. The capital is guaranteed no matter when you withdraw and if the withdrawal happens before expiration, 2 PLN are subtracted from interest per each 100 PLN. This obviously assumes that government won’t default but it’s a safe bet in my opinion.

[Ayesh]

Speaking of things that could keep up with inflation, such as stocks, gold, real estate, Treasury bonds, etc, stocks are by far, the most liquid one, with T+3 days of cash out time. Look for unit trusts (index funds), if you don't fancy picking the stocks.

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.

[dageshi]

Don't over think it. It's an emergency fund, just top it up out of income or divert money that otherwise would've gone to investments to it.

[bradlys]

I used index funds. For me - huge emergencies were so unlikely that I would lose a lot of money by keeping it in cash. Yes, having $50k+ in cash is nice but it also does lose value by sitting in that account every year. Kept it in index funds instead and would withdraw in $10-20k lump sums as needed. Never saw a loss - and there were significant market downturns when I had to use this.

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)

[Archelaos]

For emergencies I got myself a line of credit from my bank using my stocks as collateral. Currently the line of credit amounts to apox. 20% of the values of my stocks, which is far below the possible maximum, just to be sure in case of a falling market. The interest rates for such a credit are modest, because there is a collateral.

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.

[donclark]

Could you transfer your portfolio into bonds during market instability (#BIL specifically), so it stays flat during most draw downs vs falling down, then switch out when markets return to normal?

I created an account this week with https://beta.getquantbase.com/

I have not invested yet...

[iamthemonster]

It probably depends greatly on your personal circumstances but if you are already investing, or have a Home Equity Line of Credit available, or good credit so that you can get credit cards, then it's quite possible that an emergency fund is just not required (or in other words you keep your emergency fund invested) https://earlyretirementnow.com/2021/05/26/the-emergency-fund...

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.

[k8sToGo]

Stocks don't make sense for emergency funds. They go up and down. Emergency funds have to be available 24/7 and you cannot wait until it goes up again.

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.

[fy20]

A lot of this is very US specific. Large amounts of credit for cheap with little due diligence is not a thing in Europe. The banks in my country do not even offer home equity loans.

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.

[nprateem]

You're owning a slice of companies that have loaded up on cheap debt.

In the 70s you'd have lost 30% of your money in adjusted terms if you put your money in a tracker.

[misja111]

Stocks as a general protection against high inflation is an extremely bad advice, unless you specifically pick those stocks that will go up together with inflation. But most stocks will do exactly the opposite! The reason is that stock prices are inversely correlated with market interest rates. And when inflation goes up, central banks will increase interest rates to suppress inflation. This is happening at this moment already.

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.

[davidkuennen]

How big should an emergency fund be? In my case it would be so small that even inflation wouldn't justify having it somewhere that is not my savings account.

Everything that is not an emergency fund is in stocks/etfs.

[glutamate]

3 months essential expenses is the standard advice for emergency cash fund size

[vxjester]

First try saving $1000. Then after that. go save for what ever your total expenses are for 3-6 months. It should be in an account that you can quickly get to. Not in stocks. Just a plain old savings account works.

[AussieWog93]

Cap notes. Relatively stable, decent yields and easy to sell when you need to.

Do your research on which is the best yielding. In Australia, at least when I last checked, it's LFSPA.

[d--b]

The most straightforward way is inflation-linked bonds. It will pay a coupon linked to inflation.

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.

[schemester]

Some brokerages let you have a debit card and/or checking account, and you can borrow on margin from invested funds.

[Rarok]

When you don't have a emergency fund you don't have to worry about how to manage it.

[nathias]

crypto

[AndyMcConachie]

Don't take financial advice from HN.

[idontwantthis]

If you can move money to Cambodia, banks give 3.50 interest on a 1 year fixed deposit in USD and 6.50 in KHR.

[atemerev]

Diversify. Buy some crypto. Some Swiss francs. Emergency food stash. Get some cash. Diversification is protection.

[shmde]

How about a fallout shelter ?

[atemerev]

Not yet, I think. And it won't save you without the appropriate public civil defense infrastructure anyway.

[sjmm1989]

Find something you can buy for cheap and successfully resell for more without issue. Use the profits from that to help subsidize the cost of inflation.

Probably not the solution you are looking for, but it should work...

Otherwise, I don't know.

[luciusdomitius]

Right now the two alternatives are PHYSICAL gold(massively undervalued) and BTC. ECB won't really increase interest rates as the last time they did it (11 years ago) half of Southern Eurozone almost went bankrupt. Out of the stock market - probably energy and defense stocks. Also food production and commodities.

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.

[dlkf]

> 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.

[luciusdomitius]

Could you provide some arguments instead of derogatory qualifiers? Also, how do I report posts that go against the rules?

[acme_]

Do not put your emergency fund into btc.

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.

[sofixa]

Which country in South America has better and more stable economic prospects than the EU? A few of them have very serious structural issues, high inflation, dependency on specific economic sectors or unsustainable agriculture, and there were even defaults not that long ago.

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.

[glutamate]

Gold and BTC are not suitable for emergency funds: liquidty, low volatilty and easy access is what you are looking for.

[luciusdomitius]

In a highly inflationary environment, low volatility simply means you get burned. OP is asking how to avoid exactly this.

[unmole]

Having emergency funds in highly volatile assets simply means you get rekt in an emergency.

[luciusdomitius]

Alright, let's look at historical data - who was more successful at fleeing Nazi Germany? The ones who had jewelry in their pockets, or the ones holding a fat bag of reichsmarken? It is THIS obvious.

[bb123]

An emergency fund is for paying your mortgage if you lose your job, or settling a large car repair bill. No one here is seriously asking how to protect their investments while fleeing on foot from a genocidal regime in total war.

[Adrox]

Yeah in South America you are much more free to get robbed or murdered. (I'm talking about Brazil, Argentina, Colombia, not sure what's your preferred country).

[luciusdomitius]

If you can handle a gun, it is much easier to defend yourself against a bunch of robbers, than the entire state apparatus.

[david38]

Spoken like someone who has never done so.

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.

[bb123]

Don’t put your emergency fund in gold and BTC. It needs to be liquid (I.e same day available) and predictable.