There was once a time in America when putting money away in a savings account didn’t seem so foolish. In fact, it was widely considered to be the best way to save and invest money if you didn’t have access to the stock market. Of course, there was a time when people trusted their savings accounts even more than they did any stockbroker. With the relatively recent collapse of interest rates, though, there really aren’t any particularly safe, easy-to-access places to keep your emergency fund where it will build enough interest to seem worthwhile.
The trouble, of course, is in how we’re thinking about the interest offered by savings accounts. Once we rearrange our thinking a little bit, it just might have the effect of bolstering our confidence in the good old fashioned savings account once again.
What, you ask, is this rearrangement? To begin with, savings accounts should never be considered permanent holding accounts for the greater part of your life savings. The key is diversification. Sure, it’s a good idea to have a few bucks stashed for a rainy day, but the reality of the situation is that beyond your emergency fund, you really don’t need to keep much in your savings account.
Of course, that begs the question, how much is enough? For most folks, just the emergency fund kept in savings is plenty to ensure you’ve got enough disposable cash on-hand that you won’t need to dig into your more lucrative investment accounts to pay for things like auto repairs, home repair, or other emergency situations. In this economy, which is on the mend, but still not where it used to be for strength, it’s a good idea to keep around 3-6 months of expenses tucked away where you can get at them quickly if necessary. More than that, and you’re just wasting your ability to earn some interest income.
Although they don’t earn much interest, savings accounts are still the best place for emergency funds because they’re quickly accessible, but not so easy to use that you end up using your emergency fund on daily expenses. Additionally, you’ve got FDIC insurance with the account, so long as there aren’t millions and millions of dollars in there, it’s in a safe place where thieves won’t be able to grab it!