Should I try to hedge my emergency savings against currency and political concerns?

Question

I'm planning to save 15% of my income for emergencies. I live in Ukraine and I am concerned that the local currency may not be stable long-term. I'm also worried about the possibility of banks closing. Should I separate my savings into three boxes? I was thinking of separating them as follows:

• 1/3 in a local account denominated in US dollars or Euros
• 1/3 in the local currency in a state bank account in Ukraine
• 1/3 in a cash mix of US dollars, Euros, and local currency

I don't need the money from the foreign currency account to be quickly accessible.

I will have 10-25% of monthly salary left over after bills, groceries, and savings as outlined above.

Should I keep money in a local bank denominated in a foreign currency, or is it better to keep the money in a foreign currency in cash?

If I don't have enough cash to open an account denominated in a foreign currency, what is the safest way to keep it until I have enough saved to open that account?

Some context: I live in small town (with my parents) working for a minimum wage which is about $60 (after taxes) per month. If things goes well, minimum wage in my country will be raised to about $140 (at current exchange rate before taxes).

Half of my salary is consumed by bills, a small part by groceries (my parents, cover most of groceries).

During last year I managed to "save" about $250 and spend them as planned: some house electronics, English language tutor, and presents. I entered 2017 with $5 on hand and $30 on my payment card.

Answer 1

First thing is that your English is pretty damn good. You should be proud. There are certainly adult native speakers, here in the US, that cannot write as well.

I like your ambition, that you are looking to save money and improve yourself.

I like that you want to move your funds into a more stable currency.

What is really tough with your plan and situation is your salary. Here in the US banks will typically have minimum deposits that are high for you. I imagine the same is true in the EU. You may have to save up before you can deposit into an EU bank.

To answer your question: Yes it is very wise to save money in different containers. My wife and I have one household savings account. Yet that is broken down by different categories (using a spreadsheet). A certain amount might be dedicated to vacation, emergency fund, or the purchase of a luxury item. We also have business and accounts and personal accounts.

It goes even further. For spending we use the "envelope system". After our pay check is deposited, one of us goes to the bank and withdraws cash. Some goes into the grocery envelope, some in the entertainment envelope, and so on.

So yes I think you have a good plan and I would really like to see a plan on how you can increase your income.

Answer 2

You have to balance several concerns here. The primary problem is that if you go to the effort of saving your money you want to also be sure that your savings will not lose too much of its value to inflation. Ukraine had a terrible inflation spike in 2015 for obvious reasons. Even as inflation has settled down in 2016, it is stabilizing around 12% which is very high

Exchange rates are your next concern. If you lose a large percentage of the value of your money just in the process of exchanging it, that also eats away at the value of your money. If you accept the US Federal Reserve target of 2% inflation, then you should only exchange money that you will hold long enough that both exchange fees will outweigh the 10% inflation advantage.

Even in cases where you have placed your money in a foreign currency, there's a chance that your government could freeze accounts denominated in foreign currencies, so there's always the political risk that you have to factor in. For that reason keeping foreign currency in cash also has some appeal because it cannot be confiscated as easily.

You could still certainly be robbed, so keeping all of your savings in cash isn't a great solution either. All in all, you are diversifying your savings if you use the strategy of balancing all three methods. Splitting it evenly to 5% for each method isn't the most important. I would suggest taking advantage of good exchange rates (as they appear) to time when you buy foreign currency.