Investors should still keep emergency funds liquid after the Fed's interest rate cut, advisor says
Despite falling rates, investors should still keep emergency funds "liquid," meaning the cash can be easily accessed, financial experts say
After years of higher yields on cash, the Federal Reserve's shifting policy means lower future returns on savings, certificates of deposit and money market funds.
Despite falling rates, investors should still keep emergency funds "liquid," meaning the cash can be easily tapped, financial experts say.
Advisors typically suggest keeping at least three to six months of cash reserves for emergencies, such as a job layoff. But that threshold could be higher, depending on your circumstances.
Keep those funds in high-yield savings or a money market fund, said certified financial planner Kathleen Kenealy, founder of Katapult Financial Planning in Woburn, Massachusetts.
"You don't want to mess with your safety net," she said.
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The Fed last week slashed its benchmark interest rate by a half percentage point, which was the first rate cut since early 2020. Banks use the federal funds rate to lend to and borrow from each other. As a result, it influences consumer loans and savings rates.
While top yields have already fallen slightly, many savers are still getting relatively high rates on cash.
The top 1% average for savings was hovering near 4.75% and the highest one-year CDs were more than 5%, as of Sept. 25, according to Deposit Accounts. Meanwhile, the biggest retail money market funds were still paying around 5%, as of Sept. 24, according to Crane Data.
If you've been earning 4% to 5% on emergency savings, you could see a "small reduction" in the short term, said Kenealy, who recommends keeping emergency funds where they are.
Don't put your emergency fund at risk
After several months of stock market gains, it may be tempting to funnel emergency savings into higher-paying assets. The S&P 500 was up about 20% year-to-date and notched a 52-week high on Sept. 25.
But investing your cash reserves is a mistake, experts say. Generally, short-term savings, especially funds that could be needed within the next year, should stay out of the market.
"You don't want to put your emergency funds at risk," said CFP Shehara Wooten, founder of Your Story Financial in Fairborn, Ohio.
You don’t want to put your emergency funds at risk.Shehara WootenFounder of Your Story Financial
Whether you're dealing with a job loss or major car repair, you need easily accessible cash. Otherwise, you could have to sell invested emergency funds when the stock market is down, she said.
"Don't make rash decisions based on what's going on at the Federal Reserve," Wooten said.
This story originally appeared on: CNBC - Author:Kate Dore, CFP®
