Shark Tank star and investment mogul Kevin O’Leary says keeping large sums of money in a low-interest savings account is a big mistake.
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Interest rates on high-yield savings accounts are the highest they’ve been in years —see the best savings account rates you may get now here — and that’s bringing a key question back into focus: How much should I be saving? For “Shark Tank” star and investment mogul Kevin O’Leary the answer is this: three months’ worth of salary in case of emergency.
For her part, Suze Orman recommends 12 months of expenses (not salary) in an emergency fund right now — a number she increased from eight months of expenses as a result of the pandemic. And Dave Ramsey’s guidance is that you should save roughly six months’ worth.
The reason O’Leary doesn’t recommend more? He says keeping large sums of money in a low-interest savings account is a big mistake. “Right now in a bank account, you’re getting very little [interest],” he said in a CNBC interview.
To be fair, he said this back in May, and savings accounts are now paying more — see the best savings account rates you can get now here. “With the Federal Reserve raising rates, there is interest in savings. You might need to look at money market funds, but you can get 2% to 3% on your cash reserves. These do not have FDIC insurance and take an extra day or two to get your money versus a checking or savings account, but depending on how much you’re putting in, you’re receiving a decent return on your cash reserves,” says certified financial planner Spencer Betts.
Since pros like Orman and O’Leary don’t perfectly align on how much emergency savings you need, we asked some certified financial planners their thoughts.
“You want to make sure you have enough to cover yourself if you lose your job for a while, have other unexpected expenses at the same time, make house payments to make sure you don’t lose your house and be ready for all of this during a stock market downturn,” says certified financial planner Keith Spencer of Spencer Financial Planning.
The three primary things Spencer discusses with his clients when determining how much they need to have in an emergency fund are the level of income they have, the type of employment they have and the size of their housing payments. “Your type of employment matters because it might make it more or less likely you’ll lose your job. If you’re in a stable, salaried position, you may not need as much cash but if you’re in a commissioned role, having more cash on hand would be wise,” says Spencer. The reason it’s so important to have an emergency fund that can cover mortgage payments is so that a homeowner doesn’t default or go into foreclosure as a result of missing payments if they lose their job.
Indeed, much of the emergency-fund question depends on life stage and circumstances. “If someone is about to make the leap into entrepreneurship and starting a new business, they’re going to want a year or more of cash reserves. But if someone is an empty nester, with a stable career, maybe three to six months works because their expenses are lower and they have less uncertainty in their job,” says certified financial planner Eric Maldonado of Aquila Wealth Advisors.
Though savings accounts are paying more, you might be asking yourself: But they’re still not outpacing inflation so why should I put the money in savings? Paul Collinson, certified financial planner at Legacy Planning Advisors, notes that an emergency fund is not an investment, so you shouldn’t be overly concerned that interest rates paid on insured deposits are low. “The main purpose of the emergency fund is to reduce the need to use borrowed funds to cover unexpected expenses or to sell assets in a down market. That said, certainly choose accounts where recurring fees can be avoided and where balance requirements can be met while receiving a competitive interest rate,” says Collinson.
There’s also a psychological component to the right amount of cash reserves. “Some people feel more stressed when they only have three months of cash on hand, and it affects their peace of mind and for whatever reason they want nine months because they sleep better at night,” says Maldonado.
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