What's your approach to liquidity beyond an emergency fund?
Like many here, I keep:
- A current account for day-to-day spending
- A high-interest savings account for my emergency fund
- Everything else invested (S&S ISA, GIA, etc.)
This works well in theory, but I've been thinking about liquidity and how others approach larger discretionary spending.
I'm not talking about a planned purchase with a known timeline. This is more about hypothetical future spending. One day I might decide to replace my car, help my niece with a house deposit, build an extension, or something else that falls outside the scope of an emergency fund.
In those situations, withdrawing from an ISA uses up tax-sheltered space that I can't get back (unless it's a flexible ISA), while selling from a GIA could create a CGT bill (a nice problem to have I suppose).
One idea I've been considering is keeping up to £50k in Premium Bonds as a store of capital for these potential future expenses. The way I see it working is that each tax year, £20k would be transferred into my S&S ISA on 6th April, and then I'd gradually build the Premium Bond balance back up to £50k over the course of the year.
The attraction is having a readily accessible pot for opportunities or larger purchases, with the potential of tax-free rewards. The obvious downside is the opportunity cost when markets are performing strongly.
One other factor is that I would be very reluctant to sell investments during a market downturn. In that scenario, I'd probably consider only my emergency fund and any money in my current account as money available to spend, and defer discretionary purchases until markets recovered.
I appreciate there's no magic solution here and ultimately, it's a trade-off between liquidity and maximising long-term returns.
My question to others, do you keep a dedicated pot for potential future spending, or do you simply accept that any significant discretionary spending will come from selling investments when the time comes?