We’re in quite a situation lately. With mounting layoffs and job losses along with a struggling economy, the importance of having an emergency fund and cash on hand is greater than ever. But at the same time, interest rates on savings vehicles have dropped like a rock. It wasn’t long ago that you could easily get over 4% on your cash in either an online savings account or in CDs. Today, banks are cutting their interest rates almost weekly and it’s hard to find a reputable bank offering much more than 2% these days.
Since keeping cash on hand is important in these uncertain times, what are you to do when you can’t even keep up with inflation? Have you been bouncing around from bank to bank trying to keep up with the highest rates? Are you starting to focus on CDs instead of liquid savings in an attempt to get a higher rate? Or have you started looking at other alternatives?
I personally don’t play the rate chasing game. I’ve been extremely happy with FNBO Direct which generally ranks on the higher end of online savings rates. They also have a great interface and good customer service, so for me it isn’t worth the trouble trying to squeeze out another 50 basis points by moving to another bank right now. Of course, if you’re stuck in an account lagging well behind right now, it can certainly add up by getting a better rate.
But what if you already have a comfortable savings cushion? Have the rate cuts changed where you’re saving money? I know that personally I’ve stopped saving as much and have started to invest a little more. With our savings at a point that would cover the most likely emergencies, rather than putting more cash into accounts earning a percent or two, I’ve been putting a little more in the market. Obviously, I’m doing so with the realization that it may take a a year or two to begin to come out ahead with those funds, but that is a risk I’m comfortable with. I still feel that long-term, the current prices will prove to be relatively good buying opportunities even if we see further declines.
So what about you? Still saving in savings accounts? Moving to CDs or things like I bonds? Or are you also taking advantage of investing in the market? I’m curious to hear how others are handling the rapid decline in savings rates.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Thanks for posting, you bring up some vaild points. I agree with poster KC that rewards checking is another viable option. Community banks continue to offer higher yields on short term deposits to serve as economic engines, and are currently offering the best interest rates on free checking accounts. At CheckingFinder (www.checkingfinder.com), you can type in your zip code to research and compare rates of high yield checking accounts in your area. If you find an account that suits you, you can open it for free. They also have online banking - you can check out each bank's requirements and the best rates on short term deposits at select community banks nationwide.
@ Finance Junkie:
I have GOT to get an investment property.. Just don't have the cajones to jump in yet..
I'm paying off my investment properties. Weighted average interest rate on properties is 5.2%. I'm beating CD rates big time, even after factoring in the lower year-over-year interest rate tax deductions.
Despite all the changes, I haven't made any major change (only some minor tweaks). I sticking to my long-term plan.
Any cash besides our emergency fund is slowly being used to pay debt. That money was going to be used for home renovations, but that can wait.
We have a student loan at 3%, a mortgage at 3.95% (taking into account the tax deduction) and our ING accounts are <3% even when all of our older high interest rates are taken into account.
Haha, spending more is not an option??
Well, since the incentive to make my savings to grow bigger is not quite there anymore, I'm more willing to spend money on things that I need/want for a long time/saved up for. For example, I just spent over $1K to take care of car repairs that have been postponed, and got myself a nice Le Creuset pan that I've been wanting for a long time. If there is something I can invest on right now that will be a sure gain, it would be my life.
Jeremy - Very true.. I just feel there needs to be a firm line drawn between a person's emergency fund and investments. I agree 100%, it is terribly frustrating to earn close to zero on cash, but that is the price we are paying for security and liquidity right now.
Nice blog, BTW. I have it saved as a favorite and look forward to keeping up to speed on it.
We've got our cash in a rewards checking that is paying 4.53% on balances up to $50,000. We're disciplined enough to not spend out emergency fund and like that we have immediate access to it if we actually had an emergency. We used to keep our cash in HSBC, but for an extra 2% interest it was worth the move.
Chris, I'm not suggesting investing in stocks or bonds are a safe alternative to a savings account. But when savings rates were over 4%, a lot of people (including myself) were happy to put even more money into cash than was probably needed.
Now there is little incentive to do that. If you already have your 6 months of expenses worth or whatever you're comfortable with in savings, money that doesn't need to be completely liquid may have more attractive options now that rates are so low.
Where is the option for "I wish I had some cash to worry about"?
Just kidding, I've faithfully kept my money in ING Direct. It's not their fault rates keep falling, but it still hurts!
I'm laddering out CDs one month at a time (or at least trying to). My goal is to get a years worth of expenses laddered out evenly among 12 CDs. As each month matures I will roll it into a new 1 year CD. The laddering should help curb inflation risk and the continually maturing CDs will work just fine in case of an emergency.
Emergency funds need to be 100% principle protected and readily liquid. Bonds and stocks are NOT good vehicles for an emergency stash, IMO.