And the fact is that, with high inflation rates, your emergency fund savings lose their value month by month. In other words, this money is worth less over time as the cost of living rises. Is there anything that can be done?
To begin with, do not lose sight of the fact that the purpose of cash for unexpected events is to be available in case you have an unforeseen expense. That’s what those savings are for, not to generate high returns. That is reserved for long-term investment money.
And to take the idea even further, it is money that should not be risked because you need be able to use it when the time arises.
With this in mind, it is possible to look for ways to take advantage of the money you have in cash that comply, to a greater or lesser extent, with these two principles: availability and security.
Here are four options:
This may be the easiest way to put that capital to work. Interest-bearing accounts are regular checking accounts that offer an additional return for the balance you keep in the account.
You can pay household bills, make transfers and even have a credit card associated with an interest-bearing account.
With the rise in interest rates, some accounts are starting to offer attractive returns, although still below inflation (especially the underlying rate). Right now, the best interest-bearing accounts offer yields close to 3% as well as gifts if you also have your salary paid directly into that account.
The ideal way to make the best of these is to keep your emergency fund there, that cushion for unforeseen events, and use another checking account for day-to-day expenses. This way you make sure that you don’t mix savings with daily expenses.
These are a type of account designed specifically for saving.
Unlike the previous ones, they do not allow you to pay bills by direct debit, write checks or have associated cards. You can make transfers to cover any expenses you may have and you will always be able to access your money.
Savings accounts are a safer version of interest-bearing accounts and not because the money is not covered. In both cases the Deposit Guarantee Fund covers up to 100,000 euros per customer and financial institution. This additional security is the reason you cannot pay bills with this account and cannot use a credit card with it.
Otherwise, its liquidity is total. To access your savings, all you have to do is make a transfer to your daily use account.
Deposits are like a loan you make to the bank for a certain period of time in exchange for an agreed return. In other words, you leave the money in the bank for a few months and at the end of that period you receive the money plus interest.
They are an alternative way to make your cash more profitable than the two previous ones, although they have a small drawback: their liquidity is less.
All deposits are arranged for a certain period of time, ranging from three months to three years. During that time the money will be blocked and not all entities allow the deposit to be cancelled prematurely.
For this reason, it is best to combine a deposit with an interest-bearing account or, failing that, to take out deposits with different terms so that you can access part of your savings when you need them.
In any case, this is an option for those who have a large emergency fund, a very conservative profile or simply have money that they will need in one or two years and want to limit the effect of inflation.
The last option is also the most advanced. Monetary funds are a type of investment fund that invest in very short-term fixed income.
They are a more liquid alternative to direct investment in Treasury Bills and also more diversified because they invest in securities issued in many countries, not only in Spain.
This type of fund tends to have very low volatility (one of the risks of investing) and be fairly stable. On the other hand, their profitability is limited and, unlike the previous products, they are not assured.
In terms of liquidity, money market funds are fully liquid, although it may take a few days for the money to be credited to your account from the moment you issue the sell order until it is executed.
As with deposits, you cannot make any payments from a fund.
These are the four conservative alternatives for making cash profitable that meet the two basic requirements: security and availability.
In any case, please remember that this money is not there to make you a profit, but to give you peace of mind.