November 2021 – Your Emergency Fund

Do you have an emergency fund?

An emergency fund is the cash you save to pay for bona fide emergencies.

With interest rates at historic lows, and consumer price inflation at 40-year highs, it’s difficult to find a place to store cash and preserve purchasing power. Standard savings accounts pay 0.1% annual interest, and even “high-yield” savings accounts are only paying 0.5%.

Thus, it’s important to have a plan to protect your emergency fund. Inflation can be just as deadly to a safe investment as market volatility is to a risky one.

If you don’t have an emergency fund yet, or you do but feel like you could do better, here are a five steps to gain greater control and peace of mind:

1. Determine how much you need to save. This is the most important step, and it’s very specific to your situation. Standard financial services recommend 3-6 months of living expenses. I would recommend aiming for something higher. Six months of living expenses should be the minimum. The ideal is to have one year saved. This mitigates the bigger risks too, like job loss.

2. Put some of your emergency fund in the highest high yield savings account you can find. Go to bank rate to find the most up-to-date rates for high yield savings accounts. While many of these accounts still offer a low interest rate, they are much higher than brick-and-mortar bank accounts.

3. Put some of your emergency fund in U.S. government I-Series savings bonds. I-Series savings bonds enable you to save some of your cash with a higher interest rate than standard treasury bonds. You can set up an account with Treasury Direct. Each individual is limited to $10,000 per year. For example, a family of four would be able to save $40,000 in I-Series bonds. The current interest rate is 7.12%. These bonds have a 30-year maturity, however you can cash them in early if necessary. If you cash them in before holding them for five years, you pay a penalty of the three previous months interest. The interest rate on these bonds is indexed to inflation, but the value will never decrease.

4. Put some of your fund in Certificates of Deposit (CD). Navy Federal Credit Union (NFCU) offers a $3,000 Special Easy Start Certificate at 2.96% interest. If you hold $10,000 in I-bonds, $3,000 in a NFCU CD, and the remainder in a high yield savings account, you may be able to achieve an overall return of 2-3% per year.

5. Ladder your bonds and CDs so they mature at intervals and you’ll pay a minimum penalty for early access. If you need the money in your emergency fund, chances are you won’t need all of it instantly. You can purchase bonds and CDs in a way that they mature at intervals. For example, I-Series savings bonds don’t mature for 30 years, but if you don’t access the money for five years, you won’t pay any penalty. If you don’t access it for one year, you’ll only pay a three-month interest penalty. With CDs you can have them mature at one year intervals, but save some every month. Each month a CD matures, you can reinvest it for another year if you don’t need it.

With your emergency fund in a combination of I-Series savings bonds, CDs, and high yield savings accounts, you’ll get a much better return.

However, your planning shouldn’t stop there.

In the next two weeks, I’m going to offer a course to maximize returns on safe investments. This is ideal for those who want to save for peace of mind, but don’t want the risk and volatility of the market. If you’re interested, reply to this post and I’ll put you on the pre-launch list.

If you want to take your financial success to the next level, I can help you directly when you join my membership program. We’ll develop an outstanding plan to prepare for your financial future.

Don’t forget to pick up copies of The Money MissionTax Saving Strategies and The Blended Retirement System.

Have a great week, and I’ll talk to you again soon!

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