Most people have a savings account. Sometimes folks have that savings split into different “buckets”, perhaps money set aside for future specific purchases (a car, a new furnace), for contingencies (car repairs, an appliance breaks), or more generally as “emergency savings”. By its nature, “savings” is different than “investments”, because you generally want to take little or no risk with your savings, because the time horizon is shorter than for investments and this is money you really want to be available in a certain amount on short notice.
As a result, the returns you receive on your savings are typically very low, particularly in today’s low-interest-rate environment. Most people I talk with are earning between 0.01% and 0.1% on their savings, with a few folks knowing about some higher interest rate savings accounts paying around 0.4% to 0.5%. But even with those higher interest rate savings accounts, your “savings” is actually losing money over time due to inflation. With inflation over the past decade at around 2% or lower, this really hasn’t been that much of a concern for most folks. But with the recent surge in inflation (still to be determined whether this is a temporary surge or a new trend), it becomes a bit more painful to be earning 0.1% when inflation is over 6%. If interest rates start to rise, then likely the interest you earn on your savings will also rise, but not always in the same proportion, which means you will “lose” even more in comparison to inflation.
To be perfectly clear, how you approach this is very, very individual, and depends on your current stage in life, your income, your values, and many other factors. “Emergency Savings” is a much talked about term, but is surprisingly variable based on individual circumstances. There is lots of advice about having “six months” worth of expenses in emergency savings, or even as much as twelve months. That may be the appropriate amount for you, but for others that may be more than they need.
For example, one of the reasons to have emergency savings is in case of a job loss, in order to pay the bills while you are looking for a new job (and perhaps receiving some unemployment in the meantime). But what is talked about less often is assessing the likelihood of that job loss. For example, in Colorado most teachers achieve “non-probationary status” on the first day of their fourth year in a school district. Once that is achieved, their job is very secure barring any really egregious behavior on their part. Generally if there is any reduction in staff, it would affect the teachers in their first three years in the district, so these folks have a much, much, much lower need for the portion of their emergency savings meant to protect against losing their job. If married, they then need to evaluate their spouse’s job in the same way (and, if they are married to another non-probationary teacher, then the family has very little risk associated with job loss). Now, being fired or laid off is not the only way to lose your job, you could have a health issue or even a death, but those are best mitigated by disability insurance and life insurance, not emergency savings.
So how much you need in “emergency” savings, combined with how much you need in savings for other short term needs that you know about, is highly variable. So I’ll briefly share the general situation for my family to give some context for some of the ways we have deployed our savings in ways that – hopefully – will help it at least keep pace with, and possibly beat, inflation.
We are both retired teachers in our late fifties who are receiving monthly pension checks that more than cover our basic living expenses. So we have no worries about “job loss” to contend with, and we also have a healthy investment portfolio and our house is paid off. We have one daughter in college, but also have that money saved/invested in her 529 plan so that expense is taken care of. In other words, we are in a very privileged position, and so therefore don’t need as much in savings as some people might. Having said that, we still want to have a decent amount of money in something equivalent to “savings” for peace of mind and quick access should we need it for something (without dipping into our investments if possible). Here are the accounts we think of as our savings, but you’ll notice that several of them stretch the traditional definition of “savings” and may not be appropriate for everyone.
- Savings Account at Ally Bank
- I Bonds with Treasury Direct
- HSAs with Fidelity
Stablecoins with BlockFi
- Lots of Home Equity
- Solar Panels (really)
Let’s take a look at each of these.
Savings Account at Ally Bank: Ally Bank is a fully-insured-by-the-FDIC bank, but they are completely online and don’t have any physical branches. They are currently paying 0.5% (Update: As of January, 2023, they are now paying 3.3%) on savings (and, by the way, 0.1% on checking, which means their checking account is paying more interest than many people are currently earning on their savings). They also allow you to create as many “buckets” as you like within the account if you like to keep track of savings for different purposes (i.e., a bucket for savings for a future vacation, a bucket for savings for a new car, a bucket for unexpected expenses, etc.). This is the most traditional of savings accounts and, if you are currently earning something less than 0.5%, I would highly recommend checking it out. The amount we have in here varies, but we like to keep at least $20,000 or so in this account.
I Bonds with Treasury Direct: Like I wrote about recently, I Bonds have become much more popular lately with the recent surge in inflation, and this is the newest part of our savings. At the end of December, we moved $20,000 from our Ally Savings account (which had grown larger than we like to keep it) into I Bonds, $10,000 in my name and $10,000 in my wife’s name (you are limited to $10,000 per person each calendar year, although you are allowed to also invest any tax refund you may be eligible for when you file your taxes). They are currently paying 7.12% in interest and that is locked in for six months, and then the interest rate adjusts every six months. But, even if they adjust down to 0% at the six-month mark (which is the lowest they can go), we will still effectively be earning 3.56% over the course of the year (which is obviously higher than the 0.5% we are earning at Ally). Since I Bonds are likely to be higher than 0% at the six-month mark, our expectations are that we will likely earn at least 5% over the first 12 months.
There are two important caveats with I Bonds (read my previous post for all the context). First, your money is locked up for one year from your initial investment. There is no way (other than natural disaster) to get this money. So think of it like a one-year CD, only with higher interest rates than CDs are paying. Second, if you redeem the I Bond before five years, you forfeit the last 3 months of interest (which means if we did cash it in at the one-year mark, we would only receive 75% of the interest we had earned). Because of this one-year lock up period, some people may not be comfortable thinking of this as “savings” because they can’t get to it for a year. But if you are reasonably comfortable with locking up some amount for one year, once you pass the one year mark then it functions exactly like a traditional savings account, only (usually) earning a higher interest rate. If you choose, you can even begin setting up an I Bond “ladder”, where you periodically invest additional amounts so that you always have new I Bond money that is attaining the one year mark (and therefore is immediately accessible) over time. (For example, invest $2,500 now, $2,500 in three months, $2,500 in six months, and $2,500 in nine months.)
In addition to the $20,000 we have in I Bonds right now, we are currently evaluating whether to contribute up to an additional $20,000 for 2022 (we may do that at the end of this month, or we may wait a month or two, the 7.12% interest rate doesn’t reset until May). (Update: The rate for the next 6 months – which began May 1, 2022 – is 9.62%).
HSAs with Fidelity: While most people don’t think of HSAs this way, they can serve as a fantastic piece of your “savings”. In fact, once you have contributed to your HSA for a few years, this can actually serve as part of (or all of) your “emergency savings” fund (or even as a “stealth” retirement account). The key is not using your HSA to reimburse yourself for current health care expenses but, instead, pay for those out of pocket (again, this assumes you have the privilege of being able to save in your HSA and still pay for health care expenses out of pocket). You simply keep track of what you have spent on health care expenses and you are allowed to reimburse yourself at any time in the future (based on those previous expenditures). Once you have enough years of expenses built up, you effectively have an “emergency savings” account that you can tap at any time (up to the amount of expenses you have stockpiled, and obviously up to the amount you have saved in the HSA).
There are two reasons this is more attractive than a traditional savings account. First, your contributions come out pre-tax, any earnings on those contributions are pre-tax, and withdrawals (for medical expenses) are pre-tax, which means you never pay tax on this money (it’s often referred to as triple-tax-advantaged). The second reason is that you can invest this money instead of just leaving it in the “cash” account which is likely earning 0.1% interest or less. (Note: Some HSAs do require you to keep a minimum in the cash account before you can invest, so it may take a year or so before you exceed that minimum and can invest anything over that minimum.)
Now, investing this money may seem like a contradiction when we are talking about “savings” but, if you’ve had this account established for a few years and you have other savings you can draw on as well, then the risk from investing is somewhat mitigated. As a result, you have the full range of investment choices available to you (including low-cost, diversified index funds) that – over time – will almost assuredly earn more than your traditional savings account. But, again, you are introducing more risk into your “savings” here, so you have to evaluate this in the context of your entire savings, your life circumstances, and your comfort level.
For us, because we’ve been doing this for roughly eight years, and because the markets have been very kind, our HSAs (combined) are now in six figures, and we have over $30,000 in accumulated expenses – which means we can withdraw up to $30,000 at any time tax free. In other words, “savings”, yet savings that has earned double-digits for the last eight years.
Stablecoins with BlockFi: Let me be perfectly clear, this is definitely a much more risky “savings” choice and is not recommended for everyone, and you really need to get comfortable with this and understand the possible risks before choosing to add this to your “savings” portfolio. These funds are not FDIC insured and, while I think the risk is very low, there is the possibility it could go to zero. You can read this post to get a much more detailed breakdown of how stablecoins at BlockFi work, what the risks are and how both BlockFi and Gemini (who issues GUSD) mitigate those risks, and – should you decide this is something you’d like to add – a referral link that will get you (and me) a $40 signup bonus. Many folks would not consider this “savings” at all but, in the context of my family’s finances, we feel comfortable thinking of this as part of our savings (albeit a much more risky part). So, with such a lengthy disclaimer, why am I writing about this and including this as part of our savings? Well, because of the risk mitigation policies that BlockFi has in place, plus the fact that every GUSD is backed by an actual U.S. dollar deposited in a bank account, I feel like GUSD stablecoins are very likely (but not 100%) to truly be stable (meaning they will continue to be worth $1 at any time we want to redeem them). And, because of the intense demand for stablecoins, BlockFi is currently paying 9% interest on GUSD. That interest rate can – and does – change based on market conditions, but has varied between 8 and 9% for the last year. In addition, because we also signed up for the BlockFi credit card, we get a 2% bonus on our stablecoin balances (up to $10,000) each year when the credit card renews. Which means we are currently earning 11% on the first $10,000 in our BlockFi stablecoin accounts (and still 9% on anything above $10,000). So, my wife and I each have about $10,000 in our BlockFi GUSD accounts. (Through various signup bonuses and other special incentives, we also have a couple hundred dollars in Bitcoin, but we consider that just a “bonus” and not something I consider “savings” at all because of the volatility.) Because we can access our stablecoin balances at any time, and because we are comfortable with the risk and feel like they truly will be stable at $1, we categorize this as savings. Update 2-14-22: Due to new SEC regulations, BlockFI is not accepting new accounts in the U.S. of their existing interest accounts. Later this year they will have a new, SEC-approved (with the new regulations) account that is supposed to be very similar to what I described. We’ll have to wait and see if it actually is.
Edit 11-11-22: With the recent turmoil in the crypto markets, I can no longer recommend this even as a “risky” savings option. While the GUSD stablecoin has indeed remained stable so far, there is certainly much more concern that it won’t stay that way.
Home Equity: One other piece that many folks can consider “emergency savings” is the equity they have built up in their home. If you own your own house and have owned it for at least a few years, you likely have tens of thousands (or perhaps hundreds of thousands) of dollars in home equity built up (the difference between what your house could sell for and what you owe on your mortgage). If you have good credit, this means you would likely qualify for a Home Equity Loan (HELOC) at a fairly good interest rate (typically 4% or less right now). While taking on debt is not something I’d recommend, this is another option in an emergency. So if something comes up where you need a lump-sum on short notice and the rest of your savings isn’t enough to cover it, you could also tap into a home equity loan as a temporary bridge to get you through the emergency and give you time to tap into other investments if appropriate or build back up your emergency savings over time. With the relatively reasonable interest rates on a HELOC, and with you hopefully being able to then pay it off fairly quickly, it’s not that detrimental and can allow you to keep more of your money in longer term investments as opposed to shorter term savings.
For my family, we have hundreds of thousands of dollars in home equity we could tap into so, should an emergency arise where all of the other savings above wasn’t enough to cover it, we could tap into this equity if we chose to instead of having to sell some of our longer term investments. Again, we use this as a way to keep ourselves more fully invested instead of keeping a larger balance in “savings.”
Solar Panels: Okay, this last one is really a stretch to be considered “savings”, but bear with me for a moment. The impetus for this post was a lot of folks’ concerns over rising inflation and your savings effectively losing you money over time. So, if you have additional money in savings above and beyond what you feel is necessary for you to be comfortable, another way to deploy that “savings” is by purchasing something that is an inflation hedge. In this case, solar panels. Solar panels are an investment that will definitely earn you money over time. It varies a lot, but it’s typically in the 4-6% annual return range, although it could be much higher than that if inflation kicks in. Because if inflation picks up, electricity prices will also rise, yet your solar panels are already paid for – so it’s an inflation hedge.
Now, it’s definitely not “savings” because you can’t go up on your roof and take $5,000 out of your solar panels if you need the money (although that would be cool if you could), but the increased cash flow you have each month (due to lower electricity bills) can be used to build your savings back up at an effective rate that is much higher than a traditional savings account. So, if you do have “extra” money in savings that you don’t want to invest in the markets, solar panels can be a fantastic inflation hedge that can be (if you squint a lot) thought of as additional “savings”.
Okay, this post ended up being much longer than I thought, but hopefully there’s at least something in here that you find helpful. Again, I want to reiterate that both the amount of savings you need and the definition of what qualifies as “savings” is going to vary tremendously based on individual circumstances, so be sure to think carefully about what makes sense for you and what you are comfortable with. But, if you are looking to defend against your “savings” losing money to inflation, some of the ideas above may help you accomplish that.
Edit 10-23-22: You might also take a look at Taking Another Look at T-Bills.
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