ECB recently announced to decrease interest rates by 0,1 basis points to 0,05 % . What does this mean to me, a tiny little saver, who has sitting 4 to 6 times his monthly expenses in an online banking account, gaining something around 1,0 % in interest per year? Well, I’m going to receive a notification from my bank, that they are happy to announce that my interest rate will be something around 0,6 % p.a. but “they are still happy to offer such interest rates, which are above average”. Erm… great!
Due to that, I’m thinking about to dump these accounts (I have two accounts, my daily account which earns 0,8 % p.a. and one with a rolling 3-month fixed interest rate of 1,05 % p.a.) and invest it also into stock market. I try to make a short pro/cons list, which would make sense… probably.
What’s the idea behind my emergency account? The initial and main idea was to have a little safety net in case of losing my job. Currently, it doesn’t seem that I’ll get laid off in near future, but you never know what happens within a company… But how would such a layoff affect my financial situation? The biggest impact would be the missing income of (averaged) € 4.000 per month. I checked my latest unemployment benefits account and saw, that I would receive € 1.460 per month. That’s enough to live off for a couple of months, but I’m currently spending € 1.900 per month – which would decrease of course in case of an unemployment as I wouldn’t go to restaurants that often or do so many fancy holiday trips. I think I could live pretty comfortable with € 1.460 per month, but let’s assume I need a little bit more – maybe 300 Euros per month. My account balance is somewhere around € 11.000 at the moment; I could add 300 Euros per month for three years! That’s a quite long period of time – and I do not hope to be unemployed for such a long time. I could withdraw that money whenever I needed it without any costs or any other restrictions.
Another consideration when I opened the savings account was, to be liquid in case of bigger one-time investments like repairs, purchasing something essential like a new fridge or washing machine, health related expenditures like an urgent operation, etc.
Well, I sold my car in April so I do not need a lot of money for repairs. What could happen in my household? I have one bike, I have a fridge, a washing machine and gas heating. I don’t know exactly what a repair of one of these things would cost, but in general way less than € 600 – in case of the gas heating — which would probably the most expensive repair — my landlord is obliged to pay for the basic function of it. So if the boiler breaks, I wouldn’t have to pay for it. As long as I have a job I could pay for such repairs/purchases without touching the money of the emergency account. My saving-rate would suffer a little bit, but the money on the bank isn’t required at all.
What else? Health issues; in my country everyone has social security (even in case of unemployment, btw) which secures a basic medical care in case of illness or accidents. But of course our country develops to a ‘two-class society’ where the ones who could pay for something like a medical treatment on their own benefit more than the ones who couldn’t. For that reason I also own a private health insurance which costs 75 Euros per month. In case of a surgery or any other medical treatment I have the possibility to choose my own doctor and/or hospital (and in case of such an private-care, doctor’s fees are pretty high). In case of an accident or serious illness, my insurance would pay for my recovery as well as for the stay in hospital, etc. But in worst case I could be reliable to pay a contribution up to € 1.000 (e.g. if I want/need to stay in a private hospital twice per year or more often).
I think these three points — unemployment, repairs, health — were the main reasons why I created my emergency account. And now I see that I don’t need 6x my monthly expenses sitting around at maybe 0,6 %. What to do? My last idea was to put that money into an Index All World ETF. Also as a kind of emergency fund. I don’t know what could happen, but if I would need 3.000 or 8.000 Euro at once, I could sell this ETF immediately and I think, that an all world ETF is of stable value, even over a short-term period. And even if an all world ETF has one or two minor disadvantages (annually costs and high transaction costs in case of a withdrawal as well as probably some companies I don’t want to invest directly like tobacco and weapon manufacturing companies, companies that are excluded by the norwegian sovereign wealth fund) I think it’s better to invest it there than in single stocks, also from a psychological point of view. I think, it would be easier for me to sell an ETF in a case of emergency than to think about “which company should I sell now? — I need the money”.
I also picked on ETF as it’s not as easy like in US here in Europe. I don’t have access to these very cheap Vanguard ETF’s which can be held in an tax advantaged account. :( One of the cheapest I found is this one, at least it’s issued by Vanguard.
Vanguard FTSE All-World UCITS ETF (USD)
I don’t know if it’s a good idea or not to dump my emergency account and invest the money in an All World ETF instead, but it’s a consideration. Would be interesting what you readers think about that idea or emergency accounts in general. Do you have one? How much interest do you get? What do you think about the loss of money at current interest rates?