In today’s ever-changing financial landscape, the Federal Reserve’s recent policy changes have significant implications for savers. As interest rates continue to fall, the future returns on traditional savings vehicles like savings accounts, certificates of deposit, and money market funds are also expected to decline.
However, despite these lower rates, financial experts still emphasize the importance of maintaining an emergency fund. This fund should be kept “liquid,” meaning easily accessible in times of need. The general recommendation is to have at least three to six months’ worth of living expenses saved up for emergencies such as unexpected job loss or medical expenses. But depending on your individual circumstances, it may be wise to have a higher cash reserve.
Certified financial planner Kathleen Kenealy, the founder of Katapult Financial Planning, suggests keeping emergency funds in high-yield savings accounts or money market funds. This ensures that your safety net remains intact and easily accessible when needed.
The recent cut in the Federal Reserve’s benchmark interest rate has already impacted savings rates, with top yields slightly decreasing. Despite this, many savers are still earning relatively high rates on cash. As of September, top savings accounts were offering around 4.75%, while one-year CDs were yielding over 5%. Retail money market funds were also paying around 5%.
If you’ve been enjoying returns of 4% to 5% on your emergency savings, you may see a small reduction in the short term. However, experts like Kenealy recommend keeping your emergency funds where they are, rather than seeking higher returns in riskier assets.
It’s crucial not to put your emergency fund at risk by investing it in the stock market or other high-risk assets. While the stock market may be performing well in the short term, emergency savings should remain in easily accessible, low-risk accounts. Dipping into invested emergency funds during market downturns can result in unnecessary losses.
In times of financial uncertainty, it’s essential to prioritize liquidity and financial security over potential short-term gains. By keeping your emergency fund safe and accessible, you can weather unexpected financial storms without jeopardizing your long-term financial stability. Stay informed, stay prepared, and stay protected with your emergency fund.