Inflation, whether steady or steep, can have a negative impact on your savings if you don’t keep pace with it. This means that while you may be prepared for a financial emergency now, you might not be down the road. And particularly when a recession complicates the picture, padding your emergency account can be a lifesaver. If you have three months of expenses currently saved, try to increase that amount to six. If you have six months in the bank, see if you can sock away nine months’ worth. At the very least, aim to increase your savings by the same percentage as the current inflation rate to help keep you prepared in a climbing interest rate environment.
Though it’s important for investors to be cautious during recessionary conditions, there can be a potential upside when interest rates rise — investors can see higher returns on their savings. For any money you might need to access on a moment’s notice, minimize risk as much as possible while maintaining high liquidity. Here are some types of accounts that can be appropriate for an emergency fund.
High-interest Savings
You can save money in an FDIC insured high-interest savings account to generate a higher interest rate than most traditional savings accounts. And the extra interest you earn could help bridge the gap between your savings and the current inflation rate. You may find the best deals with online high-interest accounts.
Laddered CDs
A laddered CD is when an investor divides a lump sum into multiple CDs that mature at different times, so the investor can receive periodic payouts. Staggering maturity dates may also allow you to take advantage of changing interest rates. This strategy can help lower overall portfolio risk as well, which may be important for something as critical as an emergency fund.
Money Market Accounts
In exchange for higher interest rates, many money market accounts (MMAs) have minimum deposits of $5,000 or more. They have relatively high liquidity, but the number of transactions per statement period are typically limited (often to around six per month). MMAs also often have debit features that give them more liquidity than CDs or even other savings accounts.
Don’t Compromise Your Future Financial Wellness
No matter which savings strategy you choose, try to avoid dipping into your 401(k) or other retirement account. These are intended to be long-term, non-liquid investments that are meant to mature when you’re ready to retire. The taxes and fees alone for early withdrawals can reduce what’s available to you in the short term to the point where the money might not cover a significant emergency. Plus, those funds can’t be put to work in the market while they’re divested — and you may miss out on valuable growth opportunities if stocks rise. The kind of account that’s best for you depends on your financial situation, so speak with a financial professional before committing to one strategy.