Your emergency savings could depreciate in value due to one thing: inflation.
The cost is rising for everything from gasoline, which rose 20% during the pandemic, to bacon, which rose 18.7%.
Meanwhile, persistently low interest rates make it difficult to get a return on your cash and keep your money in a place that is readily available.
While all eyes are on policy makers to see what steps they can take to mitigate the situation, you may want to reassess where your money is invested.
Keep it safe
While it is frustrating to know that you are not getting a high return on your money, the important thing to remember is that you want those funds to be there when you need them.
“If cash is intended for an emergency fund or a short-term spending, it must be kept safe,” said Ken Tumin, Founder and Editor of DepositAccounts.com.
“Stocks or Bitcoin or any other type of investment are not suitable,” he said.
When it comes to keeping your emergency fund safe, there are usually a handful of options: certificates of deposit, checking accounts, savings and money market accounts, and savings bonds.
Each has potential advantages and disadvantages.
Certificates of deposit
In general, it is not a good time to invest in CDs, Tumin said, as their prices are currently at an all-time low. If you invest now, you could set this rate for the long term.
That could lead to regrets if interest rates rise in the next year or two.
Note also with CDs: hard prepayment penalties. However, around a dozen online banks now offer CDs that won’t penalize you for withdrawing your money early, Tumin said.
As a result, it can be worth poking around.
“The only reason to get a CD would be if you could get significantly more than you can get for a savings account,” said Tumin.
Online accounts
High yield checking accounts
According to Tumin, around 1,200 US banks and credit unions currently offer high-yielding premium checking accounts.
More than 150 of them offer accounts that pay at least 3% interest on deposits of up to $ 10,000.
This exceeds the average savings account, which usually only pays 0.14% interest.
As with other accounts, these often come with some conditions, such as: B. Regular use of debit cards.
However, there are other potential benefits such as no monthly fee or 2% cashback on purchases up to $ 200 per month.
Savings bonds
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According to Tumin, investing in I-bonds offers a particular advantage in today’s environment, as these are inflation-indexed.
Unlike some other investments, I-bonds allow you to defer federal taxes on the money until you pay it back or until you reach their 30-year maturity.
There are some tradeoffs, however. One disadvantage is that you are limited in how much you can invest per year. Currently the limit is $ 10,000.
You also cannot redeem the money within the first 12 months of the issue date. If you withdraw the money within the first five years, you could lose interest for three months. However, that surpasses the prepayment penalties for some five-year CDs that can earn interest for at least six months, Tumin noted.
Do your due diligence
As the demand for higher interest rates increases, new startups are pushing into this market. It is therefore particularly important to know how your deposits are protected.
FDIC insurance generally covers up to $ 250,000 if your institution goes down. But not all accounts and companies are covered.
For example, cryptocurrency savings accounts usually do not offer any protection.
“I would consider this a high risk and not a place for your money,” said Tumin.
Also, check to see if the company is working with one or more banks to hold your deposits.
“The most important thing is to stay with fintechs that only work with one bank,” said Tumin.
Some clients of a company called Beam Financial found this out the hard way when they struggled to access their deposits last year. The company, which had a model that involved working with multiple banks, was eventually shut down by the Federal Trade Commission for banking.
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