Loose Change

Loose Change: Use Premium Bonds as an Emergency Fund? I Wouldn’t!

Loose Change is a series of blogposts by members of the UK Money Blogger community where they let loose on a financial issue important to them.

This time, podcaster Jason Mountford from The Hedge explains where he keeps his emergency savings.


Ok, we need to talk about emergency funds. With interest rates being so low, and inflation running so high, there has been a lot of talk online about the best place to keep an emergency fund. One suggestion that keeps popping up time and time again, is to use NS&I Premium Bonds to keep your emergency fund.

Now I get it, right, it’s painful to see a monthly interest payment of 11p roll into our bank account, and the idea of entering a lottery to potentially win a million quid can be pretty enticing. But from my perspective, it’s crazy.

Today I want to explain exactly what I keep my emergency fund for, what Premium Bonds are and why, for me, these 2 things are like Manchester United and Liverpool fans, they just shouldn’t mix!

What Do I Use an Emergency Fund for?

Before I explain why Premium Bonds are a rubbish choice for my emergency fund, let me first share what I have an emergency fund for. I have it to give me some swagger. That might sound weird, but I never used to have an emergency fund. I used to invest a little bit each month, and then basically live pay cheque to pay cheque for the rest of the month. I thought that was the best way to go, because I had a credit card for any emergencies.

The problem with this is that it made me nervous. If my car started making a weird noise, if my laptop started playing up or if a leak showed up in the ceiling during a thunderstorm, I got worried. How much will this cost me? Do I have enough of a credit limit? How long will it take me to pay that back? Will I end up paying interest on top of the actual cost of the emergency?

I lived in a constant state of low level anxiety because I didn’t really have a safety net. Luckily, I have a wife who is much more sensible than me, and she showed me the error of my ways. For years now, we’ve had a solid cash buffer for when unexpected things happen. That’s what an emergency fund is for, in my case anyway. And boy does it feel nice!

I really underestimated the level of confidence and security that an emergency fund would bring me. Now if something breaks or we get an unexpected bill, it’s still annoying, but it doesn’t fill me with dread. 

Why I Don’t Use Premium Bonds

So I hold an emergency fund in an account for when I need cash, right then and there. What are Premium Bonds then and why don’t I use them?

Premium Bonds are a type of NS&I account that acts like a lottery. Every £1 you have in the account is 1 entry into the monthly lottery, where you can win prizes of up to £1 million. This sounds pretty cool, but it’s important to remember that you can also win £0 each month, and for many people, that’s exactly what happens. Month after month after month. NS&I say that the prize fund rate overall is 1.00%, but remember that a big chunk of that is taken by the big prizes, including the £1 million!

But the big problem with Premium Bonds is that it can take ages to get your money out. On a good day it can take a few business days, on a bad one it could take a couple of weeks, and in the midst of the 2020 Covid madness it was taking up to 7 weeks!

For me, this is why I’ve ruled out Premium Bonds for my emergency fund. When I think of what I might need to use the money for, it’s for rare, unlikely and sudden events that I just can’t plan for. It’s Friday night on a bank holiday weekend and my boiler completely packs it in.  Or I’m stuck on the side of the motorway with 2 blown tires and need a tow truck. Or we’re on holiday in Greece and some punk steals the bag with all of our passports and phones in it from the beach. 

None of these things can be planned for and they all need access to cash, quick!

Just recently, our dog needed emergency vet treatment. All in, it cost just over £1,000. We didn’t plan for that and it came out of nowhere. It was still awful, but at least we could pay for everything then and there without having to worry about chasing up NS&I for weeks. He’s fine now by the way!

 This is why, for me, Premium Bonds make a rubbish emergency fund. For a longer term cash buffer, like saving for a holiday or a new car or something, I’ll consider it. But for money that I might need instant access to in an actual emergency? No bueno.

So What Do I Use for My Emergency Fund?

For my emergency fund, I keep things as boring as possible. I keep the whole thing in a bank savings account. One with no exit penalties, no term and no waiting period for access. Whilst I don’t have a card to the account, I can transfer any amount over to my current account within a couple of seconds.

This makes it easy for me to track how much I actually have left in my current account until payday, but also means that I can get hold of some of my emergency fund whilst I’m sitting on the side of the M6 with a car that won’t start!

Yes, it pays zero interest, but that’s not what I use it for. I’ve got other investment pots to grow my wealth above inflation over the long term. In my opinion, when it comes to emergency funds, cash is most definitely king!



Articles in the Loose Change series are written by members of our community. The views do not necessarily represent those of UK Money Bloggers or other members. The articles should not be taken as financial advice.

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