Last month I talked about the importance of having three to six months emergency savings while working overseas.
There are three main ways you can store your emergency savings: in a bank account here; a bank account elsewhere; or in an investment account.
Vietnamese bank account
This makes sense if you are in Vietnam, get paid here and you are going to be in the country for a while. One thing with emergency funds is that you need very quick access to it, usually within a week. Therefore having it in a term deposit here will not work. The headline rates of between 7% and 8% are appealing but you can’t get to your money when you need it. If you get paid in US dollars, and you choose to keep it here, open a different account, put the money in there and accept that you will not be earning interest on it.
Bank account elsewhere
Sometimes called an offshore account, these have moved on from the times of secretive Swiss bank accounts. It’s now just a means of storing money in a different country to where you live. If you are working away from your home country, I would always recommend having an offshore account of some kind, especially given the transient nature of lives here. I am a big believer in never putting all your eggs in one basket and this is the way to do it.
Your investment account
Many people now have either an investment account through an insurance policy or a direct trading account.
The insurance-backed policy is not for use for your emergency savings. The way they are set up is too expensive to have ready cash sitting there as part of your portfolio.
A direct trading account may work, but you have to remember three main things — cost, time and risk. The type of investments that you or your money manager uses should be based on consideration of these things.
Your emergency funds have to be separate from your other investments. On costs, if you place the money into a fund, make sure the annual fee is less than 1% to 1.5% per annum.
You are not wanting that much growth, so don’t expect the fund manager to take too much of a cut. Also, make sure the funds are traded daily, not weekly or monthly, as that could be a long wait. That means products such as structured notes are also out. They are too long term, and breaking the contract could be pricey.
They are also too high risk for emergency funds and that discounts equities from the equation. The best place for your emergency funds within an investment portfolio is in a daily traded, low risk mutual fund. Possibly within bonds or treasuries.
Paul McLardie is a partner at Total Wealth Management. Contact him at Paul.firstname.lastname@example.org