Where I'm Stashing My Emergency Fund Before Rates Change
With rate cuts looming, now might be the time to protect your emergency savings from shrinking returns.
Rate cuts might be on the horizon, presenting an excellent opportunity for savers to capitalize on higher rates now before they disappear.
I've been a big fan of high-yield savings accounts. They're easy to set up, offer returns well above 4%, and I don't have to worry about being nickel-and-dimed by my bank.
However, if rate cuts happen, it will impact these accounts. Therefore, like you, I'm looking at changing where to place my emergency fund before the fall.
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How CDs shield your money when rates fall
Your emergency fund should cover from three to six months of expenses. However, it doesn't hurt to save even more, as layoffs continue to impact many sectors of the economy. Sometimes, it can take from six months to a year to find a new job.
According to the U.S. Bureau of Labor Statistics (BLS), the median duration of unemployment in July was 23.6 weeks — just under five months. Keep in mind that this figure includes everyone who is unemployed, even those only passively looking for work.
For many professionals, the job hunt can stretch much longer.
With this in mind, if you feel comfortable you have enough saved, you can take a portion of your savings and invest it in a certificate of deposit. CDs come with fixed interest rates, meaning if the Fed cuts interest rates, it won't impact you.
Explore some of today's best CD rates and terms here:
Key factors to weigh before choosing a CD
There are a few things you'll want to consider before locking one in. First, make sure you don't need that money for the duration of the CD's term, or you'll incur a penalty if you need to withdraw it before maturity, negating a substantial part of the interest you earned.
Two, keep an eye on inflation, which sits at 2.7%. However, the Bureau of Labor Statistics notes inflation has increased 22.7% since January 2021, while wages only rose 21.5% during this same time, creating a gap that's making it tougher for people to keep up. One way to correct this is by investing in a savings option that far outpaces inflation.
If you want to lock in rates before they drop with quick access to your cash, my suggestion is to do a short-term CD, such as a year or less, or a no-penalty CD. I'm doing a no-penalty CD because it allows me to lock in a rate well above 4%.
Many banks allow you to withdraw your money when you need to, although you usually must keep the initial deposit in the account for the first seven to 30 days, depending on the bank.
If you're seeking other options, here's a breakdown of risk strategy based on different savings vehicles and goals for each one:
Account | Interest rate | Variable rate? | Best for: |
|---|---|---|---|
High-yield savings account | Up to 4.35% | Yes | Savers looking to build an emergency fund |
CDs | Up to 4.35% | No | Best for established savers looking to shield from rate cuts |
Money market account | Up to 4.35% | Yes | Best for savers looking for easier access to their cash through check writing and debit card |
The only reason I wouldn't consider a CD is if you're in the process of building your emergency savings. In this case, I would still recommend a high-yield savings account because, unlike CDs, you can make continuous deposits.
Here's a great option to consider:
When a money market account makes sense
Money market accounts are also wise options to consider. They work like a hybrid savings/checking account in that you can earn a high rate of return and have quick access to your cash through debit card and check writing capabilities.
However, some money market accounts require a higher deposit, usually around $1,000. If you're new to building your emergency savings, I would consider them once you're more established, given that many require minimum balances.
Protect your savings from rate cuts with flexibility
Ultimately, rate cuts might be coming this year. It's the best time for savers to consider Fed-resistant options like CDs.
If you're worried about having access to your cash, consider a no-penalty CD. You'll get the cushion of shielding your money from rate cuts, with the ability to access it if you need to.
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