When inflation rates go up, it can be tempting to look for ways to grow your money at rates higher than the rate of inflation. Investing can feel more appealing than the average savings account.
While it’s important to stay the course on your investing goals, don’t neglect your savings. There are many reasons why a savings account is still worth tending to, even during tough times. If you’re making ends meet and still have extra to put aside, keep these tips in mind.
1. There’s always a good reason to keep an emergency fund
It’s hard to predict when you might need your emergency fund. But when you do need it, you’ll definitely be glad to have it. Your emergency fund is one of the most important short-term savings goals to keep up with.
Even if you have less to save than before inflation price hikes, it’s better to try to save a little than none at all. Start with building a cushion that would cover at least one month of your expenses. If you can, try to increase your savings to three months of your expenses. If you need to draw on your emergency fund in tough times, you can re-build it again.
Learn more about why, how and where to keep an emergency fund.
2. Savings can be lower risk than many investments
During times of market volatility, savings accounts can perform better than typical investing accounts. Having a savings account can also bring you peace of mind knowing it is less vulnerable to market volatility more likely to hold its value.
While you may be tempted to prioritize investments with potentially higher yields, during times of inflation, don’t overlook the value of a savings account.
Inflation shocks can have many economic ripple effects, including market volatility, so your investments can change in value. By comparison, the money you put into your savings won’t go down unless you withdraw it. Even if the interest rates on savings accounts are still lower than the rate of inflation, it can offer peace of mind to know that your savings account won’t suddenly drop in value.
A financial shock can have ripple effects that take time to settle. Read our tips to get your savings back on track after a financial setback.
3. Savings accounts keep your money accessible when you need it
Savings accounts are ideal for short-term financial goals. You might want to save for a couple years for a dream vacation or a home renovation.
Money held in savings is easily withdrawn or transferred on the day you want to make your purchase. By contrast, money held in investment accounts can take longer to be changed into cash.
If you’re trying to find money to save, try our spending habits calculator to add up how much you could save by eliminating some of your recurring expenses you might not need.
4. High inflation may be temporary, but good financial habits can last a lifetime
There’s an old adage that says the best time to start saving was several years ago — but the second-best time is now.
If you start a savings habit during tough times, chances are you’ll continue it into the future. Inflation won’t last forever, but your new habit can contribute to setting you on the path to greater financial stability.