My savings don’t make much money. I often hear people say that they would like their emergency fund to “make more money” but it doesn’t make much interest in a savings account. Sometimes they ask if they should put it in an investment that has bigger gains, but much higher volatility. They feel they a losing out by having their money sit in a savings account and often aren’t even keeping up with inflation.
One thing we should remember is the purpose of most savings, including emergency savings, is to be there when we need it. Placing the savings in an investment that goes up and down in value places you with the risk that it won’t be there when you need it. So what options do you have to make a little more than you can in your savings account? These 3 options can give you some inflation protection, maybe even beating inflation, while still being just as “safe” as your savings account.
- High yield savings accounts: Often these are offered by online banking institutions. Interest rates in August of 2019 can be around 2 to 2.5%. They include not just newer institutions but some like American Express and Citibanks. You can also get accounts that are FDIC insured, just like your regular savings account. Stick with the ones that are FDIC or NCUA insured to maintain the same level of safety as your regular savings account. The disadvantage of some of these accounts is they may have high minimum deposits. However, you can get your money rather quickly.
- CDs or Certificates of Deposit: These can be found at both banks and credit unions. They are typically FDIC or NCUA insured. These can get a higher rate than your savings account and sometimes higher than a high yield savings account. Sometimes financial institutions make special CD offers at higher rates that you may be able to take advantage of. They can be convenient if you buy from your financial institution. The disadvantage of these is that there may be a lock out period during which you can’t cash them in and if you cash then in too early you may be subject to an interest penalty. Definitely make sure you understand the terms of any CD you may put money into.
- Savings bonds. US government I bonds provide excellent inflation protection and so are a great place to put savings – but there is a big but. You can’t cash out an I bond for one year. And you are subject to an interest penalty if cashing it during the first 5 years of owning it. You can cash them in rather quickly (after the one year) and you can buy them online at treasurydirect.gov
If you choose options 2 and 3 for emergency savings, I recommend considering keeping a large portion of your emergency savings in a traditional savings account and/or a high yield savings account. That way you can tap into that first, before you take a possible hit with the interest penalties a CD may have. If you are going to rely on savings bonds heavily for emergency funds, then you need to figure out how you will cover the transition – the one year that you can’t access those funds. That may be too difficult for you and you would be better off sticking with savings accounts, high yield savings accounts, and CDs for those emergency funds.
So if you can’t stand that your savings isn’t working for you (making money) these are 3 great options that will put them to work a little bit and still maintain the principle of ensuring it is there when you need it. Be diligent in your research for which ones are best for you and if you need help with your decisions, betterfinancialcounseling is there for you.