Inflation sits at a 40-year high, but that doesn’t mean you shouldn’t have some money in your savings account for emergencies, pros say. “One of the primary reasons is the relative safety that the savings account provides for your money. While the money may not be growing significantly, it’s also not exposed to market risk and for something like your emergency fund, availability is paramount,” says certified financial planner Zack Hubbard of Greenspring Advisors. Or as Snigdha Kumar, personal finance expert at Digit, says, “A savings account can be a great tool in your financial repertoire when you need short-term savings safe and secure.” Indeed, savings accounts are typically FDIC-insured up to $250,000 — and some now offer a more than 0.50% APY (the average is still only 0.06%).
The traditional advice is keeping 6-9 months of essential expenses in an emergency fund, though some pros say you can tweak that a bit. “Regardless of the interest rate available, everyone should aim to set aside $2,500 in an emergency savings account that they don’t touch unless absolutely necessary,” says Charles Lattimer of financial well-being firm FinFit. And as Chanelle Bessette, banking specialist at NerdWallet, recently told MarketWatch Picks: “A small $1,000 emergency fund ought to cover most minor pressing expenses, such as getting new car tires or having to travel for an urgent trip, like to care for a family member in the hospital or to attend a funeral.”
So what’s your savings number? That depends on your goals, pros say: “Inflation is also a prime example of why saving money intended for the short term is valuable yet difficult emotionally,” says Brian Walsh, senior manager of financial planning at SoFi. When inflation is significantly higher than the APY on your savings, you start losing purchasing power, and that’s why it’s critical to take a step back and think about your goals and assign a purpose to your money, says Walsh. “Then you can keep the right amount in savings and invest the rest for the long term to take advantage of the benefits of both approaches,” says Walsh.
How to get higher returns on your savings
“Seek out higher returns available in an online savings account,” says Greg McBride, chief financial analyst at Bankrate. “The interest earnings can be 10-fold what you’d otherwise earn at your current bank.” Oxygen has four different consumer savings options with APYs as high as 3.00% on the first $20,000 in balances, and SoFi checking and savings accounts come with 1.25% APY assuming you have direct deposit. “Wealthfront, Chime, Discover, Lending Club and Liberty Savings Bank are examples of fintechs and banks that offer savings interest above 0.06% [the current average savings accounts are paying],” says Kumar.
Ken Tumin, founder of DepositAccounts.com, says as of March 1, online savings accounts from online banks have an average yield of 0.49%. “Several online banks have recently increased their online savings account to levels that are above this average. These include Comenity Direct with 0.75%, My Banking Direct with 0.77%, Quontic Bank at 0.65%, Live Oak Bank at 0.60% and Synchrony Bank at 0.60%,” says Tumin. Wherever you decide to put your money, Hussein Ahmed, CEO and founder at Oxygen says, “Make sure the savings account is protected with FDIC insurance.”