Why cash is the be-all and end-all for emergency funds and short-term savings

The financial advisor gives her advice to women to start investing now

Articles about emergency funds may have put you to sleep as little as a year ago. At this point, you would have been lucky to find a high-yield savings account with a 1-2% payout.

However, as interest rates rise, investing in cash can yield substantial returns and result in some of the highest interest payments in decades. This is the perfect time to lay out why building an emergency fund is so important in an environment of high and low interest rates.

Where to keep your emergency cash

An emergency fund is a cash cushion for about three to six months of living expenses. If your job is unstable, a family member has significant health problems, or you are solely responsible for all of your bills, you should aim for even higher amounts. It’s not uncommon to see emergency funds Cover the expenses of a year. With this additional cash buffer, you protect your accumulated wealth so that no situation can jeopardize it and bring your financial world down.

However, simply keeping your money in a checking account won’t do you much good, and a regular savings account isn’t much better either. According to the Federal Deposit Insurance Corp. the nationwide average annual rate of return (APY) on savings accounts was a meager 0.39% in April 2023.

Try to put your money in a high-yielding savings account that offers FDIC insurance up to the $250,000 limit. Some online savings accounts pay interest rates of up to 4.75% APR. Banks like Ally, CIT Bank and SoFi offer some of the best interest rates. American Express High Yield Savings and Barclays Online Savings Account are extremely competitive. Be sure to check the minimum deposit required, the current account balance and whether there are any current account maintenance or other fees. These accounts may also have limits on the number of monthly transfers or withdrawals. However, if this is your emergency fund, don’t touch it often.

A deposit slip is another option. CDs can be a good choice for earning even higher interest rates than online savings accounts if you’re willing to invest in a long-term CD. CDs are savings tools that ‘lock’ your money for a set period of time – from three months to five years. During this time, your cash will earn interest at a fixed rate. The longer the term chosen, the higher the effective annual interest rate. For example, CDs with a maturity of six months are currently offering up to 5.0%, and CDs with a maturity of two years are even more attractive, paying around 5.20%.

While the prospect of making more money is attractive, owning CDs also has downsides. You cannot deposit and withdraw money with CDs. If you cancel your CD before the due date, you will be penalized in the form of a reduced interest payment. The penalty can range from three months’ loss of interest to a much more painful year’s loss of interest. As such, CDs are better for people who don’t need access to that money and have cash accumulated in a high-yield savings account that they can easily use for emergencies.

Saving is also important for short-term goals

Savings for goals with a time horizon of 1-3 years should not be invested in the stock market. This applies to home purchases, car purchases and more. But of course, the same rules still apply to high-yield savings accounts and CDs.

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Hacks to build a saving habit

While it may seem daunting, by setting a goal and planning, you can save in a way that benefits your cash flow.

Diversity Woman, a publication that empowers women of all backgrounds, shares that even saving 5-10% of your salary can result in a well-stocked emergency fund and you’ll be well on your way to building your financial safety net in no time.

The easiest way to achieve this goal is to automatically allocate a portion of your salary to your emergency or short-term savings fund. Your emergency fund and short-term savings should be used for something other than your everyday checking or savings account. Instead, set up a separate space for those savings.

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https://www.cnbc.com/2023/05/22/op-ed-why-cash-is-king-for-emergency-funds-and-short-term-savings.html Why cash is the be-all and end-all for emergency funds and short-term savings


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