Savings Accounts (also frequently called Emergency Funds) are generally awful financial products for most people in most situations. With the national average savings account rate almost always under 1%, you’re almost guaranteeing that you’re losing money to inflation. Our calculator below let’s you test scenarios based on your assumptions to show you just how much per year you’re losing by having your money in a savings account compared to two other popular options.
The current national average is 0.4%
As someone who’s spent years navigating the intricacies of personal finance and sharing my insights with readers, I’ve come to understand the limitations of traditional savings accounts. These accounts, while safe, often offer interest rates that are not even close to keeping up with inflation. This means that the purchasing power of your hard-earned savings could be slowly eroding away, even as you diligently stash away your money.
Now, let’s talk about alternatives. Money market accounts, for instance, often offer higher interest rates. Many also come with the added convenience of checks and debit card transactions, marrying the benefits of savings and checking accounts. However, the exact interest rates can vary, and it’s always a good idea to shop around for the best rates.
But if you’re looking for potentially higher returns and are willing to take on a bit more risk, low-cost index funds could be your ticket. These funds aim to mirror the performance of a specific market index, like the S&P 500. Over the years, the S&P 500 has provided an average return of around 7-8% per year, significantly higher than what you’d get from a typical savings account.
Remember, though, that investing in the stock market involves risk, and it’s possible to lose money. But with their broad diversification and low fees, index funds can be a sensible choice for many investors.
In the end, the best place for your money depends on your financial goals, risk tolerance, and time horizon. Whether it’s a savings account, money market account, or index fund, make sure it aligns with your overall financial strategy.
Please note that the figures mentioned are averages and actual rates and returns can vary. Always do your own research or consult with a financial advisor before making investment decisions.
I understand the importance of having a safety net for unexpected expenses. Traditionally, this role has been filled by savings accounts. However, in today’s dynamic financial landscape, there are several other viable options to consider.
One of the first options to consider when faced with an unexpected expense is to ask for a payment plan. Many service providers, medical facilities, and even creditors are willing to work with you to create a payment plan that fits your budget. This can allow you to spread the cost over several months, making it more manageable.
Another option is to sell investments. If you have investments in stocks or bonds, you can typically sell these and have the funds in your account within three days. This can be a quick way to raise funds for an emergency. However, it’s important to consider the potential tax implications and the impact on your long-term investment goals.
Personal loans and credit cards can also be used to cover emergency expenses. Personal loans often have lower interest rates than credit cards and can be a good option if you need to borrow a larger amount. Credit cards, on the other hand, can be a good option for smaller expenses or if you need funds immediately. However, it’s crucial to understand the interest rates and terms before borrowing. The average interest rate for credit cards, for instance, is typically over 20%.
A few additional ways to pay for unexpected expenses and get comfortable ditching your savings account(s) for good:
Home Equity Line of Credit (HELOC): If you’re a homeowner with some equity in your home, a HELOC could be a viable option. This is a line of credit that uses your home as collateral. It often has a lower interest rate than credit cards or personal loans, but it’s important to remember that your home is at risk if you can’t repay the loan.
401(k) Loans: Some 401(k) plans allow you to borrow against your retirement savings. This can be a quick way to access cash, and you’re essentially paying interest to yourself since the loan repayments go back into your 401(k). However, there are potential downsides, including penalties and taxes if you can’t repay the loan on time, and the opportunity cost of missing out on investment growth.
Family and Friends: Borrowing from family or friends can be a no or low-interest way to cover an emergency expense. However, this can potentially strain relationships, so it’s important to have clear terms and a repayment plan in place.
Peer-to-Peer Lending: This is a way to borrow money directly from individuals instead of going through a traditional financial institution. Websites like LendingClub or Prosper connect borrowers with investors willing to lend money. The interest rates can be lower than traditional loans, but your credit score will still be a factor.
Emergency Assistance Programs: Depending on the nature of the emergency, there may be local or national assistance programs that can help. This could include everything from disaster relief programs to community organizations that help with specific types of expenses.
Finally, consider setting up an alternative emergency fund. This could be a money market account or a low-cost index fund. These can offer higher returns than a traditional savings account, while still providing access to your funds when you need them.
Remember, the best option for you will depend on your personal financial situation and the nature of the emergency expense. It’s always a good idea to consult with a financial advisor or do your own research before making a decision.
Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School.
After seeing the lack of personal finance education for regular people, Cody started the website with the mission to provide everyone access to information that will help them achieve their financial goals.
Cody approaches personal finance from a maximalist perspective, shunning typical advice around simply not buying a cup of coffee instead of more effective methods like investing in yourself to quickly grow your income.
He believes in saving money and investing for the future, but he also knows that you need to enjoy life today. That’s why Cody approaches money with a sense of humor and a positive attitude. He knows that if you’re not having fun while you’re growing your wealth, then what’s the point?
Cody approaches life with the same gusto that he brings to personal finance. He loves to travel and experience new cultures, and he is an avid reader and learner. He also enjoys playing sports (especially tennis) and spending time with his family and friends.