Smart Ways to Optimise Cash and Emergency Funds

August was Sorted’s Money Month, and the 2025 theme was financial resilience.

It’s a timely nudge to check how prepared we are for unexpected expenses. A solid emergency fund is still the foundation of financial security, but the way you store that money can make a big difference.

For many New Zealanders, “saving” still means parking everything in a regular bank account. While safe and familiar, this strategy can mean missing out on higher returns, tax benefits, and risk-spreading opportunities.

An InvestNow survey recently showed two-thirds of customers hold their short-term savings only in bank accounts. That’s not necessarily a mistake – but it does raise the question: could those savings be doing more?

The short answer is yes.

Every Savings Decision Is an Investment Choice

Putting money into a savings account isn’t just “saving” – it’s actually an investment decision. You’re effectively lending money to your bank, accepting their credit risk, in exchange for the interest they pay you.

Like any investment, it pays to be intentional. Ask yourself: what is this money for? Covering bills? A holiday? A safety net for the unexpected?

For most of us, the answer is a mix of all three. That’s why relying on just one savings product often falls short. Different goals call for different tools. In fact, keeping everything with a single bank can sometimes increase your risk rather than reduce it.

Where to Park Short-Term Cash: Key Options

On-call savings accounts

• Pros: Immediate access makes them ideal for everyday spending and the first tier of an emergency fund.
• Cons: Usually the lowest interest rates, and having money so close at hand can make it tempting to dip into.

Term deposits

• Pros: Typically higher interest rates than on-call accounts, with the certainty of a fixed return. Useful for planned expenses.
• Cons: Funds are locked away for the agreed term. Early withdrawals can attract penalties or be unavailable altogether, so they’re not ideal for genuine emergencies.

Cash funds

• Pros: These managed funds spread your money across a mix of short-term, interest-earning assets like deposits at different banks. They often deliver stronger net returns than savings accounts, offer diversification, and you can usually access your money within a few days.
• Cons: Returns aren’t guaranteed, and there are modest fund management fees.

Why Optimising Cash Matters in 2025

There are two big reasons why rethinking your savings strategy could make sense this year.

1. Deposit guarantee protection
   With the new Deposit Takers Act, up to $100,000 per person, per licensed bank or deposit taker is now guaranteed by the government. That’s great news for term deposit holders.

The catch? If you have more than $100,000 sitting with a single bank, any amount above this isn’t protected. Spreading deposits across several providers not only improves your coverage but may also unlock better rates outside the main trading banks.

2. PIE tax advantages
   Cash funds usually operate under the Portfolio Investment Entity (PIE) rules, which cap your tax rate at 28%. That compares favourably with the top marginal income tax rate of 39% applied to most savings accounts and term deposits.

To illustrate: let’s take the Milford Cash Fund, which as at 31 July 2025 reported a yield to maturity (the current return of the fund’s holdings) of 3.3%. Hypothetically, let’s assume there are no further changes to the fund and the full yield is realised, then after the fund’s 0.20% p.a. management fee and the maximum 28% PIE tax rate, the net return is 2.2%. Someone in the 39% tax bracket would need a standard savings account paying about 3.7% to match it, which most on-call savings accounts don’t currently come near.

A Tiered Approach to Building Resilience

You don’t have to pick just one option. A balanced cash strategy often uses a “bucket” system:

• Tier 1 – Immediate access: Keep about one month’s living costs in an on-call savings account for daily use and emergencies.
• Tier 2 – Core safety net: Hold three to four months of expenses in a cash fund. This provides diversification, tax efficiency, and usually stronger returns.
• Tier 3 – Planned spending: For specific future outlays, such as travel or home improvements, use term deposits to lock in a rate. Consider spreading deposits across banks to maximise protection under the $100,000 guarantee.

More Than Just Stashing Money Away

True financial resilience isn’t simply about how much you save – it’s about how wisely you manage it. By combining different cash options, you can ensure your emergency fund is accessible, diversified, and working harder for you.

This Money Month, it may be worth asking: is your cash just sitting there, or could it be working harder for you?

Compare low-cost Cash Funds and Term Deposits on the InvestNow platform today and make your savings work smarter.

Disclaimer:

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