Don’t Risk Emergency Funds for a Return Higher than Current CD Rates
Let's face it, rates on all types of interest bearing assets are low these days. CD Rates, savings rates, and money market rates are all at record lows. The best CD rates on 12 month certificates of deposit are just above 1.00 percent. The best savings rates and money market rates are also at or just above 1.00 percent.
We are going on over four years of low rates and might continue to see rates this low until mid-2015, during which the Federal Open Market Committee plans to keep the Fed funds rate near zero percent. Since rates are low, you might be tempted to move your emergency funds into higher return, higher risk investments such as stocks, which on average garnered returns of 16 percent in 2012.
Hindsight is 20/20 and you never know what the markets are going to do in the future. When you invest in stocks or mutual funds, your principal is always at some degree of risk. Risking your emergency fund in stocks or bonds isn't the best course of action. If there is a downturn in the economy (which is always a possibility), stocks will take a hit and you'll find your principal at risk.
Remember what happened to stock prices back in 2007 when the financial crisis hit? The major indices declined over 50 percent in 2007. When a recession hits there are usually layoffs. Your nest egg can lose a large percentage of its value overnight and usually when you need it most. A layoff or other financial hardship can put you and your assets at unnecessary risk.
You want to have your emergency account in a risk free, one hundred percent FDIC insured account. Your returns will be low for the next couple of years but rates will move higher. Before the financial crisis, average 12 month CD rates were around 3.00 percent and you could find the highest CD rates around 5.00 percent. If the economy takes off and inflation becomes a concern, before you know it CD interest rates could be back to those levels - and possibly before 2015.
Think the best CD rates available are low? Average bank CD rates are even lower than the best rates available. Current 12 month bank CD rates this week are averaging 0.23 percent in the FDIC Weekly National Rates and Rate Caps Survey. Average money market rates are at 0.11 percent and average savings rates are even lower at 0.07 percent. Deposit rates have been low since the financial crisis and the Great Recession. However, our rate tables list many rates offered that are higher than the national average. Find the highest rates currently offered at //cdrates.monitorbankrates.com.
Banking & Finance InformationPersonal Finance