It’s a great time to put money into a savings account. At the moment, he can earn more than 4% profit from the savings account balance without taking any risks. Provided, of course, that the bank is FDIC-insured for him and limits his balances to less than $250,000.
In contrast, when you invest in stocks and other assets, you can lose some of the money you invest, or in extreme circumstances, all of it. So it’s a blessing that he can earn more than 4% without any risk.
It is certainly so. However, there was a time when the interest rate on my savings account was ridiculously low. For years, I basically had no choice but to accept his less than 1% interest on my money for the privilege of having my money in the bank.
But I don’t regret my decision to do so. And even if interest rates go back to that point in the future, I’m still going to keep saving money. Here’s why:
need a safety net
SecureSave recently reported 63% of Americans don’t have enough savings to cover an unplanned expense of $500. But this is a pretty upsetting statistic. Because the reality is that every working American should strive to have at least three months’ worth of emergency funds. What this means is a savings account with enough money to cover her three months’ worth of necessities such as rent, food, and medicine.
Of course, if you can grow your savings beyond that, even better. However, if you can save three months’ worth of expenses, you will have cash reserves available in the event of a period of unemployment. You can also earn money that can be used for emergency car or home repairs.
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On the other hand, since I’m going through some financial troubles, I always try to keep my money in a savings account, regardless of the interest rate. Many years ago, I suddenly lost my job when my company needed to downsize. I was a good employee and did nothing wrong, but the company had to lay off many of us. Having an emergency fund made it relatively easy to cover my living expenses until I could find work again.
Recently, I have encountered various home repair issues as my home has gotten older. Water heaters, air conditioners, and recently he had to replace two heating systems at the same time. And each time, my emergency fund helped me.
If your savings account pays out minimally, is it better to keep your money in stocks or other assets? Of course. But doing so risks losing money.
Let’s say you need to withdraw a large sum of money and you put your emergency fund into a stock or market tank. Suddenly, you realize your investment loss, making an already bad situation even worse.
The interest rate on your savings account should not be your deciding factor
If you have money that you would like to set aside for a long-term goal, go ahead and invest it. However, funds set aside for emergency expenses or situations such as unemployment should be kept in the bank, regardless of which savings account they are paid into.
In fact, don’t think of your emergency fund as an opportunity to make money. Think of it as a safe place for your money that you need to have available at all times.
You can put your non-emergency savings to use by investing with the hope that the cash will grow. But make a commitment to always maintain a minimum safety net with your bank, even if interest rates on savings accounts are horribly low.
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