As inflation pushes up the prices of everything from food to gasoline, your emergency money could risk losing value.
Persistently low interest rates are unlikely to keep pace with soaring costs.
Rapid inflation could continue for several months, Treasury Secretary Janet Yellen said in a recent interview, while other experts see price hikes lasting longer.
In the meantime, you may want to reassess where your emergency money is deposited.
“With cash, if it’s for something like an emergency fund or a short-term expense, it should be kept safe,” said Ken Tumin, founder and editor of DepositAccounts.com . “Stocks, bitcoin or other types of investments are not suitable for this.”
When it comes to storing your emergency fund, there are usually a handful of options: certificates of deposit, checking accounts, savings and money market accounts, and savings bonds.
Each offers potential advantages and disadvantages.
Investing in I bonds offers a particular advantage in today’s environment because they are indexed to inflation, according to Tumin.
Unlike some other investments, I Bonds allow you to defer federal taxes on silver until you redeem them or they reach their 30-year maturity.
However, there are some tradeoffs. One downside is that you are limited on how much you can invest per year. Currently, the limit is $ 10,000.
You also cannot redeem the money within the first 12 months from the date of issue. If you withdraw the money in the first five years, you could lose three months of interest. However, this exceeds the early withdrawal penalties for some five-year CDs, which can represent at least six months of interest, Tumin noted.
If you want to keep it simple, an online savings or checking account may be the best bet, Tumin said.
“By being liquid, you always have the flexibility to move it if the rate drops or you find a better rate elsewhere,” which is especially important if you’re worried about inflation, Tumin said.
High yield chequing accounts
About 1,200 US banks and credit unions currently offer high-yield checking accounts, according to Tumin.
Over 150 of them offer accounts that pay at least 3% interest on deposits of up to $ 10,000.
This beats the average savings account, which typically only earns 0.14% interest.
Like other accounts, these often come with certain conditions, such as regular use of a debit card.
Still, there are other potential benefits, such as no monthly fees or 2% cash back up to $ 200 in purchases per month, for example.
Certificates of deposit
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Generally, now is not the best time to invest in CDs, Tumin said, due to the fact that their rates are currently at their lowest. If you invest now, you could lock in that rate for the long term.
This could lead to regrets if interest rates rise over the next two years.
Another thing to watch out for with CDs: severe early withdrawal penalties. However, a dozen online banks are now offering CDs that won’t penalize you for withdrawing your money too early, Tumin said.
Therefore, it may pay off to shop around.
“The only reason to get a CD would be if you could get a lot more than you can at the rate of a savings account,” Tumin said.
Look for certain protections
As the demand for higher interest increases, new start-ups are entering this market, which means it’s especially important to know how your deposits are protected.
FDIC insurance will typically cover up to $ 250,000 in the event your institution fails. But not all accounts and businesses are covered.
Cryptocurrency savings accounts, for example, usually don’t offer any protection.
“I would consider this a high risk and not a place for your money,” Tumin said.
Also check if the company works with one or more banks to hold your deposits.
“The most important thing is to stick with fintechs that partner with one bank,” Tumin said.
Some clients of a company called Beam Financial learned this the hard way when they struggled to access their deposits last year. The company, which had a model that included working with multiple banks, was ultimately banned by the Federal Trade Commission from engaging in banking business.