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You should have a savings account open at all times, even when interest rates are downright terrible. Read on to see why. [[{“value”:”
Savings accounts have had a pretty good run over the past couple of years. But if you check out the interest rate on your savings account today compared to a few months ago, you’ll find that it’s probably lower.
The Federal Reserve lowered its benchmark interest rate by half a percentage point in mid-September. And that rate cut was only the first of several the Fed is likely to make in the coming year.
Because of that, savings accounts interest rates are apt to fall. You may feel like pulling your money out of a savings account in light of that, but that could be a huge mistake.
You always need a savings account
Although savings accounts are generally paying less interest now than they were over the summer, plenty are still offering APYs of 4% or higher.
If you’re not happy with the interest you’re earning on your savings, it pays to shop around. Click here for a list of the top savings accounts today.
But even if savings account rates fall to 2%-3% next year, or even lower (which has certainly been the case in the past), it still makes sense to keep some money in a savings account.
A savings account is one of the only places you can earn interest on your money without restrictions. You can deposit as much money as you want, and you can withdraw as much as you want at any time without an early withdrawal penalty like a CD imposes.
For this reason, a savings account is the best place to house your emergency fund. And everyone needs an emergency fund.
Without one, you could wind up deep in credit card debt due to an unplanned expense like a home repair, or due to a period of unemployment. That could wreck your finances.
Keep the right amount of money in a savings account
Even though interest rates have fallen and are expected to continue doing so, you should not cash out your savings account. Rather, leave yourself with a complete emergency fund at all times. For most people, that means having at least three months’ worth of essential bills in the bank.
With interest rates on the decline, you also don’t want to overfund your savings account. So if you have more than three months’ worth of expenses in savings, you may want to withdraw the remainder and put it elsewhere. Since the best CD rates are still strong, now’s a good time to open one before rates drop even more.
Or, if you’re looking at money you don’t expect to need or use for a good seven years or more, invest it in a brokerage account instead. Historically, the stock market has delivered much higher returns over time than savings accounts and CDs.
In fact, if you have $3,000 in savings beyond what you need for emergency fund purposes, investing it at a 10% average yearly return could leave you with a little over $20,000 after 20 years. That 10% annual return is consistent with the S&P 500’s average over the past 50 years.
But remember, your goal in keeping money in a savings account isn’t to snag the best possible return. It’s to have a safe place for the money you might need in a pinch. So while you should absolutely shop around for the best savings account rate possible, you should also keep your money in one of those accounts at all times — even if interest rates reach the point where you’re earning pennies on your emergency fund.
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