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?
Ask HN: How do you protect your emergency fund from inflation?
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Re: Ask HN: How do you protect your emergency fund from inflation?
#2When 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#3Find 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#4You 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#5It 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#6You 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…
This. Some money on a regular savings account, and some more as cash.
Re: Ask HN: How do you protect your emergency fund from inflation?
#7Diversify. Buy some crypto. Some Swiss francs. Emergency food stash. Get some cash. Diversification is protection.
Re: Ask HN: How do you protect your emergency fund from inflation?
#8Right 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#9How 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.
Re: Ask HN: How do you protect your emergency fund from inflation?
#10How 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.
3 months essential expenses is the standard advice for emergency cash fund size