If having a stash of cash to deal with emergencies is critical to having secure finances, then keeping it safe in the right place is just as important.
Here are Sherpa's Top Four Things to consider to help you decide where to keep it:
It needs to be accessible, but not so accessible you are tempted to spend it on other things.
You don’t want to be hit with nasty fees or taxes when you withdraw it
You don’t want to be dependent on what’s happening in the economy or share market to determine how much is in your stash.
You need certainty that you can access it when you need it
The bulk of your fund should be kept in an online high interest savings account that is NOT linked to your ATM or credit card.
This account should be with a bank so that you get the benefit of the Government Guarantee on your savings. Ideally this should not be the bank where you have your home loan.
Any account you choose should be low or no fee, pay a higher rate of interest and have no notice period or penalties for early withdrawal.
It should not be invested in anything other than cash that might create uncertainty as to how much you will have when you need it.
You should not rely on a line of credit or redraw facility on your home loan.
You may not be able to access it when you really need it – like you’ve lost your job. The Bank always has discretion as to whether it will approve the drawing. Sure, mostly you will simply log on to internet banking and the cash will just appear. BUT sometimes it won’t. I have lost track of the number of people I know who lost their jobs in financial services in 2008 during the GFC and suddenly found the Bank cancelled their lines of credit or refused a redraw request.
An offset account is better, but it is still subject to what’s known as the Banker’s right of set off. In plain English this means that if you don’t pay the Bank what you owe they can take your deposit and apply it against what you owe them. This is also a good reason to keep your deposit elsewhere.
If you have a larger (more than 3 months’) Emergency Stash, you can accept some delays or restrictions in accessing some of the funds.
You need some you can access instantly, but you could tolerate a delay on accessing a larger amount. Splitting some out into (say) a 1 or 3 month term deposit might get you a higher rate of return. Keeping some (but not all) in an offset account will reduce the opportunity cost of keeping your Stash.
Some Emergencies might mean you won’t want to or be able to rely on your partner being there to withdraw the money.
Keep some of your stash in a joint account which needs both signatures and some in your own names.
A three way split usually works well. That is, keep a third in a joint account, a third in your name and a third in your partner’s name.
If your partner is injured and unable to withdraw funds, you will have some you can access immediately while you sort out with the bank or solicitor use of your power of attorney.
Alternatively, you may need to be able to escape an abusive relationship or your partner might drain your joint accounts and skip town. Believe me, it happens more often than you think! And nobody ever believes it will happen to them.
Look after your stash – you never know when you will need it.
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With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.