You might believe then, that there’s not much benefit to having money readily available in the bank. As an advisor, however, I beg to differ. Even with rates this low, the vast majority of people should have access to a bank or credit union account.
The COVID-19 pandemic is a very current and obvious reason why having an emergency fund is so important. Missing just one paycheck has thrown a lot of households into disarray and in need of government assistance.
Unfortunately, far too many people are living paycheck to paycheck and are not in a situation where they can afford to open a savings account. It’s just a reality that so many need every penny they earn to survive. But I believe there’s also a significant percentage of the population that simply spends everything they earn regardless of circumstances.
Such households, which never plan for a rainy day, need a financial education. I encourage them to learn to pay themselves first. A good start would be to resist the temptation to spend and put a few dollars in the bank every pay period.
The nice thing about having a few months of living expenses in the bank is that it can minimize or even eliminate worry. With money in the bank, you may still be concerned, but not panicked over market downturns. Or if your employment is tenuous, having a two-month cushion certainly helps to reduce any anxiety and provide some semblance of comfort.
Suppose you and your spouse have been saving for a down payment on a house. In theory at least, that’s sacred money. You can’t afford to lose it on a bad or risky investment. There’s nothing worse than finding your dream house and discovering that it’s financially out of reach.
Risking money is never a good idea, but it’s especially true for money you may need for a goal that’s less than three years out. That’s why I suggest parking some cash in banks and credit unions for short-term goals and for establishing a rainy-day fund.
People often ask me where they can put their spare cash in order to get a higher interest rate. There are alternatives, of course, but they often entail a huge step up the ladder of risk. For most households, even with low rates, insured bank deposits are best.
The bottom line is that long-term investing has its ups and downs. It can be unpredictable and, as I often point out, require an iron stomach. Even though interest rates are at a minimum, having money in the bank helps relieve the pain that comes with an iron stomach.
It’s difficult to get excited about low interest rates, but it is nice to know when you need to get your hands on cash for an emergency, like losing your job, that you have a rainy day fund. Rates may be low, but it’s a good idea to have a few fallback dollars in the bank.