Should You Invest Your Emergency Fund? Here's What Suze Orman Says

A worried man and woman looking at bills and a laptop

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Suze Orman says it time and again, and I have to agree: Having a healthy emergency fund is one of the most important things you can do for your personal finances. You really never know what's going to come down the line, be it a personal disaster or a worldwide one.

How much you need to set aside is most dependent on your income. Many experts say you need at least six months' worth of expenses set aside. Suze Orman used to say eight months. Now -- in a post-2020 world -- Orman has upped the ante, suggesting a 12-month emergency fund is not excessive.

Either way, you're looking at a pretty hefty pile of cash in your emergency fund. So, what do you do with it? Folks eyeballing record inflation rates right now may be thinking they need to invest that money before inflation takes a big bite. But, Orman says that's a big no-no.

Your emergency fund isn't an investment

Although Orman is a big proponent of investing your excess savings, she's firm on the opinion that your emergency fund should be entirely separate from any of your investment accounts.

"I now recommend aiming to have an emergency savings fund that can cover up to 12 months of living costs," she says on her blog. "But I keep hearing grumbling that keeping so much money in a savings account right now is such a lousy investment, because it’s near impossible to earn more than 1% interest."

She's definitely hitting the nail on the head, there. The average savings account interest rate is actually a measly 0.06% -- less than a tenth of a percent. The best savings accounts are the ones getting that sad little 1% APY. Even online banks, which typically have the highest interest rates, seem to be stalled around that 1% mark.

With inflation topping 8%, having five-figures' worth of cash sitting in an account, just losing value every day -- that can be a hard pill to swallow.

Orman agrees that a savings account isn't a great place to maintain the value of your money. But, she argues, that's not the goal of your emergency fund.

"You are right, that is a lousy investment! But an emergency savings fund is not an investment. It is security. It is peace of mind. It is protection." She goes on to say, "Sure, I am just as frustrated as you are that safe savings rates are so low right now…But I would rather be frustrated than lack the peace of mind that my family will be okay no matter what comes our way."

There are ways to ease the pain of low APYs

Although we're at the mercy of the banks for what kind of interest rate you can get on your savings account, there are a few ways you can hedge your bets.

For one thing, it's a good idea to shop around a bit when looking for a savings account for your emergency fund. Don't just settle for whatever APY your current bank offers -- play the field. As we noted above, online banks tend to offer higher rates than brick-and-mortar banks (mostly thanks to the lower overhead of not having physical branches).

You may also want to look into new account deals or other bank bonuses. (If you're familiar with credit card sign-up bonuses, it's like that, but for your savings account.) You can easily earn $100 to $300 or more with a new savings account.

You'll likely need to meet certain balance or deposit requirements. For example, you may need to maintain a certain minimum balance for the first six months, or make a set number of deposits each month. In many cases, the bonuses are tiered; the more you can deposit, the more you can earn.

Even with these extras, you'll probably still be losing a bit of value on your emergency fund with inflation like it is. But you'll have the peace of mind of knowing you can weather the next disaster. And that's priceless.

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