October 28, 2020
All financial planners urge clients to have savings for unexpected expenses. We refer to it as an emergency fund and suggest anywhere from three to nine months of cash be kept in “this bucket.”
Interest on savings were starting to move upwards until the pandemic struck and the Fed reduced rates again. The current average interest paid on savings accounts is 0.05%. On $100,000, the interest earned is $50 per year. This low rate is expected to continue the next few years.
While the positive side of low interest rates includes lower mortgage rates for home buyers and interest on credit cards, it hurts savers and investors. Yields on bonds are low as are savings and money market funds.
While interest rates are low, please don’t let it deter you from saving for those unexpected expenses. Holding cash for emergencies is not an investment for the future. Any interest is a bonus. You don’t want to lose any money on your emergency fund.
With most of us saving more because we aren’t spending as much (almost twice the savings as 2019), the question may arise about paying off debt. In many cases this is a good idea. It is likely the interest on your debt is higher than the interest on your savings.
Please don’t confuse savings with investing. Investing for the future requires a longer time horizon and the ability to absorb the risks inherent when markets move down and up.