Financial planners generally recommend keeping 3 to 6 months of expenses in liquid savings as an emergency fund. 3 to 6 months of expenses is the benchmark because it provides a buffer period if you’re laid off from your job, suddenly find yourself on the hook for expensive medical bills, or if the markets experience a downturn.
But 3 to 6 months of savings is no small chunk of change—so where should you keep this money? Below, we describe a few different options to house your emergency fund with pros and cons for each. We’re also including our recommendation for a unique solution Wurz Financial Services is now offering that may be the perfect balance between an account that is too risky and an account that is too conservative.
1. The Stock Market
The first option is to invest your emergency fund in the stock market and put it to work for you. This option may earn you more over the long term, but investing your emergency funds entails risk and may make your funds less readily available. After all, this money should be expressly reserved for emergencies, and you never know when disaster will strike.
If you’re laid off from your job during a market downturn, your capital may be much less than the amount you originally invested, and you may not have the luxury to wait for the markets to recover. There’s a reason financial advisors and other experts recommend keeping your emergency fund liquid. You want to ensure you have access to that money on your terms when you need it the most.
2. Savings Account
With that in mind, it seems the most logical option would be to keep your emergency fund in a savings account. But with interest rates as low as they are, you’re hardly earning anything on that money. There are online high-yield savings accounts, but even these accounts offer very low interest rates these days. (And since the Federal Reserve has indicated interest rates will remain low until 2023, it’s not likely that high-yield accounts will offer more attractive rates anytime soon.)
With low interest rates, you risk your emergency fund losing purchasing power over time due to inflation. This is almost as bad as losing money in a market downturn, and, in fact, it may be even worse in the long term. The markets have always recovered from downturns in the past, but when you lose purchasing power to inflation, there’s generally no way to make up those losses.
Every little bit helps in making progress toward your goals. Earning just a few percentage points more can yield much more over the long term thanks to the nature of compounding interest. So, is there an in-between option that is less risky than the stock market but can earn more returns than the interest rates on a savings account?
3. Open A Brokerage Checking Account At Wurz Financial Services
At Wurz Financial Services, we think we’ve found a solution. We can now offer our clients access to an exclusive brokerage checking account. This is a standard individual or joint account with check writing or debit card privileges to give you immediate liquidity and access to your funds when you need them.
We manage the account using a very conservative strategy that may not earn as much as your retirement accounts, but should at least yield more over time than a low-interest rate bank account. We believe this solution provides the peace of mind you need to know you can always access your emergency fund, but without the heartache of knowing it’s losing purchasing power.
How Else We Can Help You
Our team thrives on finding innovative solutions to our clients’ most pressing financial problems. Whether you’re wondering where to invest your money, how to find out if you’re ready for retirement, or need help developing sound income withdrawal strategies for your future, we’re here to answer your questions and find solutions to your financial concerns.
Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or dpw@wurzfinancialservices.com today!
Also, please join us at one of our free webinars:
- Social Security 101: The 3 Rules To Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough To Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
About Darren
Darren Wurz is a co-owner and financial planner at Wurz Financial Services, an independent, family-owned and operated financial services firm dedicated to helping its clients transition from their working life to a comfortable retirement with confidence. Darren received his Master of Science in financial planning from Golden Gate University and also holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. He operates the Northern Kentucky/Cincinnati office of Wurz Financial Services and is an active member of the Northern Kentucky Bar Association, the Northern Kentucky Chamber of Commerce, and the Covington Business Council. To learn more about Darren, connect with him on LinkedIn.