Why Now's an Especially Good Time to Boost Your Savings Balance
- Having extra money in savings could buy you more financial protection.
- It could also lead to a higher amount of earned interest.
There are two reasons, actually.
Believe it or not, there is such a thing as having too much money in savings. Even during periods when savings accounts are paying generously, you're likely to earn a higher return on your money in a brokerage account, especially if you're savvy about choosing investments.
But that doesn't mean boosting your savings is a poor choice. In fact, now's actually a good time to add some extra money to your savings account. Here's why.
1. You might need the extra cushion in case a recession hits
Inflation has been soaring for months, and the Federal Reserve is trying to combat that by implementing a series of interest rate hikes. The logic is that if borrowing gets more expensive across the board, consumers will begin to cut back on spending. That should, in turn, narrow the gap between supply and demand that caused inflation to skyrocket in the first place.
But the Fed needs to strike a very delicate balance in the course of its interest rate hikes. And if borrowing gets too expensive too quickly, it could easily lead to a major decline in consumer spending that spurs a recession. Once that happens, job loss numbers could pick up and more people could become reliant on their savings in the absence of having access to a paycheck.
Even if you're not particularly worried about your job right now, it could pay to shore up your savings in case layoffs come down the pike. Now generally speaking, you're in pretty good shape if you have enough money in savings to cover six months of living expenses. And you're in excellent shape if you can cover nine to 12 months of bills with the money you have socked away in the bank. But if you only have, say, three months' worth of living expenses in your savings account, now's a good time to add to that.
2. Banks are finally paying more generously
For years, savings accounts were paying such minimal interest that it was almost negligible. But in the past few months (and following the Fed's recent rate hikes), savings account rates have picked up nicely. And that means that if you boost your savings right now, you might earn more interest.
Granted, you have the potential to earn a much higher return in a brokerage account. But that brokerage account return isn't guaranteed and comes with risk.
Savings accounts are a no-risk prospect. If your bank is FDIC-insured (which it probably is), you're protected from losses on up to $250,000 ($500,000 if you have a joint account with a partner). As such, you can earn interest without having to worry about losing any of your hard-earned money.
We don't know if a recession will hit in the near term, but it's a possibility everyone should prepare for. And we definitely do know that banks are paying customers higher interest rates these days. Both of these circumstances fuel the argument to add to your savings now if you're able to do so.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 11x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.