ERNIE

I was talking last week in my blog about when to take cash from investments, or swap out of equities into cash. There’s something about having money in the bank that’s almost comforting compared to having it fully invested in equities, which sometimes feels like you’re chained to a madman. Okay, with money in the bank you know you’re probably losing out with the pathetic interest rates on offer, but inflation is low at the moment so perhaps now is the least-worst time to have some cash to hand.

Last year I was forced to cash in equities in order to live, and it wasn’t all that nice to do it. On the other hand, it forced me to think about where my money sat, and why. After all, I’d invested for years partly in anticipation of taking the money when I wanted it, or needed it, to fund life after work. It was just that this had come a bit earlier than I’d expected. Maybe I wasn’t ready for it, mentally or financially, but I found that cashing in your savings to fund the monthly expenses that your wages used to cover was quite a painful experience.

When I returned to the workplace I resolved that I’d try not to be such a tightwad with my investments going forward and would start to unwind them in order to enjoy some of the psychological freedom it might give me. I sold out of a few odds and ends investments that still sat in my portfolio and placed the cash released into a savings account, where it currently sits waiting patiently for me to dip into as and when I choose. And, as I say, I like the security of having it there. It’s a bit like the “emergency fund” that quite a few financial bloggers and gurus would recommend that everyone has to hand – you know, a fund of money that would cover your monthly expenses for maybe three to six months? The advice goes that only when you have that sum readily available in cash should you then think about serious investing.

I never used to bother with that concept as this “emergency fund” seemed like dead money to me. I wanted my cash to be working and was prepared to accept the risk that in the short term it might be working for me and sometimes against me. In the long run, however, I was betting heavily that it would pay dividends versus any standard savings account which, I felt, was akin to stuffing money into a mattress.

I have to admit that I haven’t completely shaken that notion and thus I haven’t sold any investments recently to place any more into cash. But that changed this weekend when I read one of my favourite financial columnists, Hunter Davies, going on about Premium Bonds in the Sunday Times Money section. “Now there’s a thing”, I thought as I read. “It’s like having money in the bank that’s not doing much day to day, but is having the odd flutter on your behalf once a month.” I liked the idea, it’s almost even better than Matched Betting.

Suddenly, although I’ve known about them for decades, the idea of Premium Bonds appealed to me and, pretty much within half an hour of reading about them, I’d bought a substantial amount with the cash that was sitting in my savings account. As yet, I haven’t decided if I’ll sell an equivalent amount of equities to replace that cash, but I’m thinking about it with the markets being where they currently are. As I said last week, I swore that when the FTSE hit 7,000 I’d cash in my UK Index funds. The trouble was, if I did, what would I do with the money released? Well, I think I’ve found part of the answer through ERNIE. I don’t know yet how much actual comfort he’ll give me, but he won’t rob me blind and he’s not a madman. In an uncertain world, he’s not too bad a bet.

15 thoughts on “ERNIE

  1. Hi Jim

    Good to hear that you’ve ‘discovered’ ERNIE.

    Premium bonds have fallen out of favour with savers and investors over the years, with various articles going on about how they give poor returns, how most people don’t win any prizes etc.

    However, I always saw them as somewhere to park my cash (safer than under the mattress!), with the bonus that you might win something (tax free) – even with my small holding, I’ve won twice this year.

    I intend to put a chunk of my redundancy money into premium bonds – if I need to spend it, then I will just cash some of them in.

    Good luck!

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  2. I think the returns are certainly unpredictable and lumpy without having a large number. I have just opened my own account for the first time because I am a) now paying higher rate income tax b) going to exceed the tax free savings interest allowance and c) need to keep in cash for a house purchase. I would be very loath to entertain them otherwise.

    The large number helps to smooth the returns and maximise benefit from the tax free status. It is extremely hard to estimate actual likely returns, as the variation is different with different investment amounts (and the benefit obviously depends on your income tax band).

    Potential income is delayed for up to two months by the eligibility rules (first draw entered is the month following the first full month following the month in which you purchase!!). And then of course there is a hard limit to your maximum holding. Should inflation rise, I would not count on keeping up, especially if holding a small number.

    But hey, maybe you’ll win the top prize!

    The best estimator of return that I’ve found is money saving expert’s monte carlo simulator for ERNIE, and will give you some idea of return for different tax levels and investments – it doesn’t take account of the two month opportunity cost though.

    Good luck!

    S

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  3. Well this was educational. I had no idea what ERNIE was and I’ve never heard of “premium bonds.” I thought gambling was a very popular pasttime in America, but we have nothing on the level of you Brits. So if I have it correct, these bonds don’t pay you anything, unless your number comes up in a lottery? That just sounds incredibly frustrating to me. Can’t you just buy a normal tax-free municipal bond fund, and get the returns predictably?

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    • Hi Norm, it’s a wee bit like the lottery in that your stake can win you a prize, but you never lose your stake. So say you invest £1,000 for 1,000 “tickets” in the monthly draw. You keep it there for the next ten years and then decide to quit, and you get your £1,000 back out. In that ten years you could have won a couple of prizes, which equate to the “interest”on your bonds.. You might win nothing, all the same, but you don’t lose money either (providing inflation is zero over that time.)

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    • Sadly, we don’t have municipal bonds in the UK, only government bonds (like treasuries) – and they aren’t tax free unless held in a tax advantaged account.

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  4. I came out of premium bonds over the summer when the prize pool rate went down having been in 18 months. It was an experiment for me to see if I could do better than keeping in low rate bank accounts and also aimed to at least match the prize pool rate. Well the prize pool was 1.35% and my return was 0.90% so decide to look elsewhere. While I didn’t have an appetite to chase the best current account deals, my appetite to risk shot right up over the summer (brexit) with me deciding to risk on the stock market which is doing well (touch wood).

    While each bond has an equal chance of winning I did wonder from my short time having bonds whether there was a law of luck, I had 5 pots of bonds, 3 over 10k and 2 under 10k, the pots over 10k won prizes 4 times more often than my 2 smaller pots.

    Stats –
    in it for 18 months
    Wins – 27 x £25
    15 win months
    3 no win months

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  5. Hi Jim,
    I am glad to hear you found Ernie after this time! I have part of my emergency fund in there, partly its a bit more fun in that I can dream about winning big (although yet to happen… but one day…).. but also and more importantly, its tax free on any winnings. I earn next to nothing on other cash accounts so why not! If I were zero tax or lower rate tax payer I would probably still go with PB’s – simply as a bit more interesting to keep my emergency cash in. Given I have had the majority of the cash emergency fund for about 15 years I have never had to dive into it, so I do sometimes question the point, but there is a comfort of knowing i have it.

    Hope work is keeping you fulfilled!
    London Rob

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    • Cheers Rob, I’m still enjoying work and the sentiments you’ve expressed about ERNIE are exactly how I feel too. I’ve invested enough in the markets, but cash in the bank is doing nothing. That could be true about Premium Bonds too, but you never know, it could be you!

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      • Hi Jim,
        Glad its still going well 🙂 Exactly, you need to keep your emergency cash somewhere, so why not have a bit of fun – I’ve done quite well so far this year with quite a number of £25 wins, but I do sometimes dream of hitting the £1M jackpot – that would make FIRE much closer 😉
        London Rob

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  6. The returns on premium bonds will have zero expected correlation with every other asset class in your portfolio, have high positive skew and are guaranteed to have (notionally) positive returns. This is an incredibly attractive property from a portfolio construction point of view and calls for having a small allocation to them.

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