Emergency Funds in Today’s Low Interest Environment (Article)
Emergency Funds in Today’s Low Interest Environment
Most people understand the importance of having an emergency fund. We know that life can throw us a curveball at any moment, and we might find ourselves in a situation that requires us to access cash fast.
Most financial advisors recommend individuals and families have between 3- and 6-months’ worth of expenses set aside in case of an emergency. If you have expenses of $3000 per month, this means an emergency fund of $9,000 to $18,000. Does that seem like a lot? It is, but try to envision a situation where you, your spouse, or both are suddenly out of work. Will you be able to find new employment quickly? Will your bills be reduced at all? Will unemployment benefits be enough?
If you have the money saved, the next decision is where to put it. Right now, interest rates on savings accounts are at historic lows. If you save at your local bank or credit union you might only get 0.03%. Moving to an online account will typically earn a better return but even they are barely yielding 1%*. These low rates may make it tempting to try to increase return by investing in the stock market. But investing your emergency funds in volatile investments can have potentially disastrous results.
This year, many people realized the importance of an emergency fund as the country experienced high levels of unemployment due to Covid-19 concerns. This coincided with a huge drop in the value of stock market assets. In other words, if your money was invested in the stock market in March and you needed it to pay your bills, your funds were reduced dramatically at the worst possible moment.
This illustrates the importance of thinking about your safe short-term money in a different way than your long-term money. Earning 0.03% or even 1% return isn’t fun but it is safe. Think of your emergency fund as an insurance policy against crummy events, and the return you are missing out by not being in the market as your premium.
For illustration purposes only. As investment returns are variable, we cannot guarantee any certain investment return or result. Historical performance information has been compiled from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is not a guarantee of future results. Francis Investment Counsel does not provide legal or tax advice.
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