Should you invest your emergency fund? This is what Suze Orman says
Remember the real reason for your emergency fund.
- You need an 8-12 month emergency fund, which should be kept in a savings account.
- If you need access to money, it should be available and not tied to investments.
- Comparison shop for higher savings account APYs and bonus offers to help ease the sting.
Suze Orman says it over and over again, and I agree: Having a healthy emergency fund is one of the most important things you can do for your personal finances. You really never know what’s going to happen, whether it’s a personal or global disaster.
How much you need to set aside depends mostly on your income. Many experts say you need at least six months of expenses. Suze Orman said eight months. Now – in a post-2020 world – Orman has upped the ante, suggesting a 12-month emergency fund isn’t excessive.
Either way, you have a big pile of money in your emergency fund in front of you. So what do you do with it? The folks watching record inflation rates right now may be thinking they need to invest that money before inflation takes a big bite out of it. But, Orman says that’s a big no-no.
Your emergency fund is not an investment
Although Orman is a big proponent of investing your excess savings, she is a firm believer that your emergency fund should be completely separate from all of your investment accounts.
“I now recommend aiming for an emergency savings fund that can cover up to 12 months of living expenses,” she says on her blog. “But I keep hearing grumblings that keeping that much money in a savings account right now is such a lousy investment because it’s next to impossible to earn more than 1% interest.”
She definitely hit the nail on the head there. The average savings account interest rate is actually 0.06%, or less than a tenth of a percent. The best savings accounts are those that receive that sad little 1% APY. Even online banks, which typically have the highest interest rates, seem to stagnate around that 1% mark.
With inflation exceeding 8%, five figure cash in an account, losing value every day, this can be a tough pill to swallow.
Orman agrees that a savings account is not a great place to maintain the value of your money. But, she argues, that’s not the purpose of your emergency fund.
“You’re right, it’s a lousy investment! But an emergency savings fund isn’t an investment. It’s security. It’s peace of mind. It’s protection.” She goes on to say, “Of course I’m just as frustrated as you are that safe savings rates are so low right now… But I’d rather be frustrated than lack peace of mind that my family will be fine, no matter what. no matter what comes our way.”
There are ways to ease the pain of low APYs
Although we are at the mercy of the banks as to what kind of interest rate you can get on your savings account, there are several ways to hedge your bets.
For one thing, it’s a good idea to shop around a bit when looking for a savings account for your emergency fund. Don’t settle for just any APY offered by your current bank – play the field. As we noted above, online banks tend to offer higher rates than brick-and-mortar banks (mainly due to the lower overhead costs of not having physical branches).
You can also consider new account offers or other banking bonuses. (If you know about credit card sign-up bonuses, that’s it, but for your savings account.) You can easily earn $100 to $300 or more with a new savings account.
You will likely need to meet certain balance or deposit requirements. For example, you may need to maintain a certain minimum balance for the first six months or make a set number of deposits each month. In many cases, the bonuses are staggered; the more you can deposit, the more you can earn.
Even with these extras, you’ll still likely lose some value on your emergency fund with inflation as it is. But you’ll have peace of mind knowing you can weather the next disaster. And it’s priceless.
These savings accounts are FDIC insured and could earn you up to 12 times your bank
Many people miss out on guaranteed returns because their money languishes in a big bank savings account earning almost no interest. Our choices of best online savings accounts can earn you more than 12 times the national average savings account rate. Click here to check out the top picks that landed a spot on our shortlist of the best savings accounts for 2022.