I'm a 28 software engineer. I make around 26k, of which about 40% I set aside every month. In my two-and-a-half years working I now have about 24k savings.

I've recently opened an account that allows me to lock money into a savings account - the more time I lock it, the higher the interest. The money is still insured so I don't really risk anything, and the interest rates (ranging from 1% for 9 months to 2.3% for 5 years) seem higher than anything else with the same amount of risk - zero - that I can find around. There is not way to get access to the money (aside from the interest) once it is bonded.

I've read Is there a good rule of thumb for how much I should have set aside as emergency cash? but I don't think I'd feel comfortable in locking up all my money but for 6 months survival with no way to get it back if needed before the end date of the saving period.

My idea was to put around half of what I have into the longest bond (5 years), but I'm not sure whether this is a good idea, since 5 years seems such a long time.

Is putting a substantial amount of money into such an arrangement a good idea? How should a tool like this be used?

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    A bank can't refuse to give your money to you if you want to withdraw it. I'm guessing that these locked accounts just have some sort of associated fee if you decide to withdraw early?
    – David K
    Jul 13 '17 at 12:55
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    That sounds more like a CD or bond, rather than a traditional "savings" account. Jul 13 '17 at 13:21
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    @Ordous Unfortunately is before taxes =( I do have ~100 euro each month in food stamps. My luck is that aside from food, rent and the rare treat I live a very frugal life, which I don't mind at all.
    – Svalorzen
    Jul 13 '17 at 14:43
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    I'd look for a product that is more like a CD than this product, CD's have rates similar to what you describe, but you can withdraw funds at any time, paying a small penalty if withdrawing them early, the penalty is usually some number of months worth of interest, like 6 months for the 5-year, so as long as you don't withdraw in the first 6 months you wouldn't lose any of your principal. This makes CD's an attractive place to store a portion of an emergency fund.
    – Hart CO
    Jul 13 '17 at 15:07
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    What is your location?
    – quid
    Jul 13 '17 at 17:08

Firstly well done on building a really sold base of savings.

An emergency fund needs to have two key characteristics:

  1. Be enough to get you through a typical emergency event (often seen as approx. ~6 months’ salary in your style of situation assuming you have no dependents etc)

  2. Be liquid and available to you instantly if an emergency arises

Once you have decided how much you will need for 1), you then generally find the best interest available on an instant access savings account and leave it there. It's important to note that because you need it very liquid and very secure you will basically never make (nor should you expect to make) any sizeable rate of interest on your emergency fund.

Once this is done, whatever left should be invested in an asset/mix of assets that best fit your risk profile - of which long term bonds are a completely legitimate option, but it's hard to say without knowing more about your long term aims/liabilities/job market etc.

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    I would say ~n months of expenses, not salary. Salary can be pretty variable for some people, and may not be even close to what living expenses look like.
    – jaredready
    Jul 13 '17 at 14:28

One issue which I don't see addressed in the answers so far is how to structure bank accounts to get the highest return possible. What you're describing sounds like a certificate of deposit (CD):

'ranging from 1% for 9 months to 2.3% for 5 years'

There is a concept which was once more common called a CD Ladder, which still allows you to access your money, while also giving you the highest interest rate offered by the bank.

To set one up you divide your account into 5 equal parts, then open 5 CDs with different periods (1-5 years). Each time a new CD matures (once a year), you purchase another 5 year CD with those funds, plus any new money you want to save.

Thus you're getting a higher and higher rate, until all of your accounts are earning the 5 year CD rate, and you're never more than a year away from getting money out of the account if a need comes up.

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    Interesting. But in case of an emergency, isn't "one year at most" a bit too long? Jul 14 '17 at 9:55
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    @EricDuminil You could take out a personal loan, even if interest rate was high you would only need it for max one year (average 6 months) instead of max 5 years (average 2.5 years). There is even a 1/12 chance that you could put it on a credit card and pay off within the month (vs a 1/60 chance if all of your money is locked up for 5 years). This does assume that you only need at most 1/5th of your CD savings for your emergency. Jul 14 '17 at 13:19
  • In addition to this nice answer, and definitely stating the obvious: 1. The cycle here can be shortened to once every 9 months (instead of once every 1 year) especially if you don't need parts of exactly the same size, AND 2. If you keep a few months of expenses in cash, the chance that you need a loan to bridge any gaps becomes really minimal. Jul 14 '17 at 14:38

No, don't bother. You need to decide what you are saving for, and how much risk you are prepared to take.

It would make sense if you wanted the money only in x years, and couldn't afford to lose say 20% or more if the stock market crashed the day before you needed the cash. Typically if you are about to retire and buy an annuity, you want to protect your capital. This isn't you.

At 28, you might be saving for a wedding, a deposit on a house, possibly for school fees, or for eventual retirement. It doesn't sound like you need to get back exactly 24k in July 2022.

Keep the 6 months expenses in accounts that you can withdraw from at short notice. Some of this in a current account, some might be in a savings account that doesn't pay interest if you make withdrawals.

After that, I'd stick most of the rest in stock market tracker funds, but you might go for actively managed funds instead (ask another question and take professional advice, there will presumably be local tax considerations too), and add in most of your monthly savings too. These should beat the 2.3% over the 5 years, and you can liquidate them easily if you want to buy a house.

If there is a recession and a stock market dip, you presumably have the flexibility to hold on to them longer for the economy to recover. And if you are intending to buy a house, then a recession will probably also involve a fall in house prices, so the loss in your savings will be somewhat balanced by the drop in the purchase price of your house.

Of course, the worst case scenario is a severe downturn where you lose your job, are unemployed for a considerable period of time, burn through your emergency fund, and need to sell shares at a considerable loss to meet your expenses. You might have family or dependents that you can borrow from or would need to support, which would change your tolerance for risk. Having money locked away for 5 years in this scenario is even worse. So if you don't want to put all your non-emergency savings into the stock market, you still want to choose something that is accessible at a slightly lower interest rate.

But ultimately it sounds like you can afford to lose some of your savings, and the probability is that you will be rewarded with much better returns than 2.3% over 5 years.


Lets imagine two scenarios:

1) You make 10.4k (40% of total income) yearly contributions to a savings account that earns 1% interest for 10 years. In this scenario, you put in 104k and earned 5.89k in interest, for a total of 109.9k.

2) You make the same 10.4k yearly contribution to an index fund that earns 7% on average for 10 years. In this scenario you put in the same 104k, but earned 49.7k in interest*, for a total of 153.7k.

  • Special note here. At the 10 year mark, you are earning over 10k in interest every year; that is as much as your 40% contribution.. At the 13 year mark you are making as much in interest as you were spending: 60% of your income, or ~16k.

The main advantage is option 1) has more liquidity -- you can get the money out faster. Option 2) requires time to divest any stocks / bonds. So you need enough savings to get you through that divestment period. Imagine another two scenarios where you stop earning income:

1-b) You stop working and have only your 109.9k principal amount in a 1% savings account. If you withdraw 15.6k yearly for your current cost of living, you will run through your savings in 7 years.

2-b) You stop working and have only 20k (2 years of savings) in savings that earns 1% with 153.7k in stocks that earns 7%. If you withdraw your cost of living currently at 15.6k, you will run through your investments in 15 years and your savings in 2 years, for a total of 17 years. The two years of income in savings is extremely generous for how long it starts the divestment process.

In summary, invest your money. It wasn't specified what currency we are talking about, but you can easily find access to an investment company no matter where you are in the world. Keep a small amount for a rainy day.

  • Please don't confuse "interest" with "price increase" let alone "dividends". Stocks don't earn interest; they rise and fall in value (price) and may or may not pay out dividends.
    – user
    Jul 13 '17 at 18:27
  • I am not sure whether this answers the question, given the clear emphasis on 'zero' risk. Jul 14 '17 at 14:45

Edited answer, given that I didn't address the emergency fund aspect originally:

None. You've said you don't feel comfortable locking it away where you wouldn't be able to get to it in an emergency. If you don't like locking it away, the answer to "How much money should I lock up in my savings account?" is none.

On a more personal note, the interest rates on bonds are just awful. Over five years, you can do better.

  • While some risk is beneficial for investing if you can tolerate it, the question is specifically about an emergency fund, where it is important to minimize risk as much as possible. A mutual fund / index fund likely has many times more risk than a simple guaranteed interest-earning investment. Jul 13 '17 at 12:46
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    The top level question is "how much money should I lock up in my savings account?" If you're locking it up, it's not for emergencies. I've edited my answer to more specifically address that
    – Moschops
    Jul 13 '17 at 13:35
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    If interest rates on bonds are awful, it means you should put the money into a money market fund. I agree that interest rates are awful, but I still wouldn't recommend investing emergency fund money into stocks. The prices of stocks are also awful today, and the only reason people buy them is the awful interest rates on bonds.
    – juhist
    Jul 13 '17 at 17:54

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