This year, the focus of Money Month is on emergency funds. Whether you’re aiming to have 3 – 6 months of savings set aside for unforeseen expenses or prefer the security of 12–18 months, one thing remains constant; these funds should be kept in liquid, low-risk investments. Cash or short-term term deposits are ideal. The key is accessibility – being able to get your money quickly when you need it most – and capital preservation.
But with term deposit rates sitting below 6%, it’s understandable that some investors might feel tempted to seek higher-yielding alternatives. However, ‘reaching for yield’ can be a dangerous strategy when it comes to money that’s supposed to provide security during life’s emergencies.
Emergency funds are not for risk-taking
By definition, emergency funds serve a very specific purpose; to be there when you need them. That means the priority must be on safety and liquidity – not return. These funds are not meant to grow wealth or beat inflation. Instead, they’re your financial buffer against life’s unexpected events – a job loss, medical emergency, or major expense.
Investing emergency savings into higher-risk products can undermine their purpose. Many investments advertising attractive headline returns come with hidden complexity, lack of liquidity, and far greater risk than is immediately apparent. This is especially true in today’s market environment, where low interest rates have pushed more people toward non-traditional income products.
When yield looks too good to be true
In an environment where the official cash rate is 3.25% and term deposits offering around 4%, offers of 8% or more should raise a red flag. Often, these types of investments – like mortgage funds, property syndicates, or direct lending products – carry risks that are inconsistent with the safety and accessibility required of an emergency fund. Common issues with high-yield investments include; illiquidity, higher credit risk, concentration risk, lower regulatory requirements and low transparency. These risks are exactly what you don’t want in your emergency fund.
Senior Trust under investigation by the FMA
The FMA’s investigation into Senior Trust illustrates how the risks of high-yield, illiquid investments can unfold in practice. Senior Trust marketed a targeted return of 8% pa (pre-tax), paid quarterly, with income generated from interest on loans to a small group of retirement village and aged care facilities.
However, when those borrowers started struggling to make their interest payments, Senior Trust began lending funds from new investors to existing borrowers, who then used those funds to repay interest back to Senior Trust.
In effect, this circular funding arrangement, where new investor money was used to pay returns to existing shareholders, enabled the fund to continue meeting its targeted returns. This highly questionable activity is what drew the FMA’s attention.
Crucially, investors had no right to redeem their shares or access capital. These kinds of structures contradict the basic principles of good investing, and highlight why emergency money must not be placed into opaque or risky products.
The role of the Depositor Compensation Scheme
From 1 July 2025, the new Depositor Compensation Scheme will provide additional peace of mind for savers. Under the scheme, deposits up to $100,000 (allowing for both principal and interest payments) with licensed deposit takers will be protected if a licensed deposit taker fails.
This means you can safely hold up to $100,000 per licensed deposit taker in term deposits or savings accounts, knowing the Government will step in if that institution collapses. However, it’s worth noting that access to these funds may not be immediate, especially if held in fixed term products. So, maintaining some money with one of the larger banks and holding some money in an on-call savings account remains a sensible part of your emergency fund strategy.
Good investing starts with purpose
Emergency funds are about protection – not performance. The temptation to chase yield is understandable, especially in an environment where returns feel insufficient. But taking on illiquidity or excessive credit risk defeats the purpose of an emergency reserve. If income dries up, and you can’t access your capital, the consequences can be severe.
From a portfolio perspective, high-yield investments – especially those that are illiquid or concentrated – should only ever sit within the growth component of a diversified portfolio, and even then, with extreme care. In our balanced portfolios, for example, alternatives make up just 4%, and only after applying strict filters around liquidity, transparency, and risk.
Focus on fundamentals
Investing well isn’t about grabbing the highest return; it’s about making smart decisions that align with your goals, timeframe, and risk tolerance. When it comes to emergency funds, this means choosing simple, transparent investments that offer daily or near-term liquidity, minimal risk of capital loss, clear understanding of returns and access conditions.
Emergency funds are your first line of financial defence. Don’t compromise their reliability by chasing extra return that might never materialise – especially when it comes at the cost of access, transparency, or security.
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Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.
Michelle Perkins
Director, Wealth Research
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.