My Emergency Fund Is Losing Value. I Don't Care
by Christy Bieber | Updated July 17, 2021 - First published on July 11, 2021
Your emergency fund could be losing value too.
Being financially prepared for emergencies is important to me. As a result, I have a large emergency fund with several months of living expenses saved up. This hefty sum of money is currently in a high-yield savings account, sitting there waiting for me in case I need it.
Unfortunately, as my emergency money sits in my savings account, it's losing value by the day. That's because inflation is rising sharply and will probably continue to do so.
Inflation refers to rising prices, and periods of high inflation aren't great for savers. Since even high-yield savings accounts have interest rates well below the current U.S. inflation rate, the money sitting in my bank account will be able to buy much less in a few months than it can today.
But even though I know my emergency money is losing value, I really don't care, and I won't be moving it any time soon. Here's why.
Being prepared for emergencies is more important than investing
The money that's set aside in my emergency fund is not an investment, and my goal isn't to earn a good return on it. In fact, I am willing to accept the fact that I'll be losing ground with the cash that's in the account.
And there's a simple reason for that: The safety and accessibility of my emergency money is the most important thing. In order to put the money into an investment that would allow me to keep pace with inflation (or even earn returns that are higher than the inflation rate), I would need to take a lot more risk with the money.
Savings accounts come with virtually zero risk of loss as long as you make sure that the bank holding your account is FDIC insured. And the money is accessible right away without penalty if I need it. There aren't really any investments that I could make that would allow me to beat inflation without losing one or both of these benefits.
If I put the money into the stock market, for example, I would probably be able to earn a better return and avoid having my money lose value due to inflation. But there would also be a chance that I could suffer losses if the market goes down after I invest. While building a diversified portfolio of long-term investments reduces the chance of losing big, I could easily end up being forced to sell stocks at a bad time if an emergency occurred unexpectedly.
Other investments such as CDs and bonds would also lock up my money and could force me to incur penalties for early withdrawal if I needed to withdraw it suddenly.
Since emergencies are usually sudden and unexpected, it makes sense to keep the money for them at the ready. And if that means it loses some value due to the fact the interest rate on my account is below the inflation rate, it's worth paying that price for the security that the cash provides.
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