Let’s face it, current accounts have been shocking for a long time now. Interest rates are anywhere from 0.5% (if you’re lucky) to essentially zero. This means that inflation is constantly eating away at your money.
Recently I’ve turned to a product that I have never really rated: Premium Bonds.
Premium Bonds do not pay any interest at all, yet each bond you buy is placed into a monthly draw with the chance, albeit a ridiculously slim chance, of winning a million pounds.
There are also a lot of smaller prizes, the smallest being £25. This obviously increases your chances of winning something each month.
Martin Lewis has built a calculator that will predict your returns based on your investment in premium bonds which is worth playing around with.
A Poor Investment
The reason I have never really rated premium bonds is that I’ve always thought the money can work harder somewhere else. A stocks and shares ISA invested in a simple index tracker or ETF should get you at least 4% on average for example.
This is still the case and likely always will be.
But this post isn’t about comparing investments against Premium Bonds.
I don’t like holding much money in cash. When I say cash, I mean in an easy access bank account. The reason I don’t like to hold cash is that it’s not working for me.
The Emergency Fund
That said, it does make sense to have some emergency money that is easily accessed.
There are many schools of thought on how much emergency money you need. Currently I keep 6 months living costs accessible. I’m pretty happy with this amount for now, but the global pandemic has really shown the importance of having an emergency fund.
With interest rates as poor as they are I’ve turned to premium bonds to keep my emergency money, rather than my usual choice of a standard bank account.
Premium bonds are fairly liquid, you can get your money out relatively quickly should you need it (inside a week) and they do give you that lottery buzz once a month.
For any emergency expense that needs an immediate injection of cash I can use a credit card that is paid off in its entirety at the end of the month.
To date premium bond wins have equated to a 1% return on my money. For transparency, that has been 2 x £25 wins on £5,000 in just under a year.
No doubt I’ve been lucky.
Many go for years without winning anything at all, although I suspect you’d have to hold a very small amount to be that unlucky.
To increase your chances of winning, you need to hold more bonds. The maximum is £50,000. They say never say never but I couldn’t see myself putting £50,000 in. As I said above there are places where that money can work much harder.
But for emergency funds, I think Premium Bonds are the smart choice until we see banks paying better interest rates again.