Hey everyone, thank you for joining me today for this week’s Friday Finance with Josh! Today, I’m going to talk a little bit about emergency funds and other savings. The simple fact is, all through our growing up process, we are told that we need to have money in a savings account. Rarely do our parents share with us the importance of investing and the inflation cost of savings. So, I’m going to go over that today with you.
When we think about savings accounts, we often think that it’s important to have as much money in savings as possible. The more money we have, the bigger cushion we have should anything go wrong financially. However, most savings accounts have interest rates that are well below 2%. Because inflation generally runs at anywhere between 1.8% and 3% per year, every day that we have money in savings accounts, we’re losing purchasing power. Ultimately, if we lose purchasing power, we lose money!
One way to get around this is to use your extra funds for high yield investments. Using a service like Betterment.com to put your money into stocks and bonds will generally help your money to grow at a much faster rate than savings accounts. Therefore, by using these forms of investments, we actually gain purchasing power as our money earns interest. But, on the other side of the coin, once you invest your money, it’s no longer liquid. This means that you can’t access cash for emergencies throughout the term of the investment.
Also, investments come with much more risk than a savings account. Savings accounts are FDIC insured. Therefore, there is virtually no risk. If the bank was to go under, the FDIC insurance would kick in and you would get your money back. However, stocks and bonds are not secure investments. In this case, if the company that you invest in goes under, you’re out of luck, never to see that money again.
So, should you keep all of your money in savings, or all of your money in investment accounts? Well, neither. It’s important use them both. Because investments are high risk and non-liquid, you always want to keep your emergency fund in savings accounts. Anything over your emergency fund should be put into investments to help increase your net worth.
But, how much money should we keep in savings as an emergency fund? You should gauge this on your level of income and how long it may take to find work should something go wrong. Personally, I like to have 6 months worth of income at least in my savings account. However, I cap my savings account at 9 months worth of income. So, when I have 9 months worth of income sitting for emergencies, every extra dollar ends up in investments and starts making me money. This way, I’m not in danger of losing my emergency fund or at the mercy of inflation!
Thanks for reading everyone! If you have any questions or concerns, or you would simply like to say hi, please leave a comment below!