How To Inflation-Proof Your Emergency Savings Fund

Emergency fund in the glass jar with cash.
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Having three to six months of expenses saved up “just in case” can help prevent you from going into debt if you lose your job, have a medical emergency or have some other unanticipated expense arise. But with inflation increasing the cost of just about everything, it can be difficult to ensure that your emergency savings is keeping pace.

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GOBankingRates spoke with financial experts to get their best tips for inflation-proofing your emergency savings fund, so you can keep your peace of mind that you’ll be covered financially for the unexpected.

How Inflation Can Affect Your Emergency Savings Fund

Inflation is typically bad news for your emergency savings.

“Inflation is likely to have a negative impact on savings based on the decline in purchasing power and the lack of opportunity to increase return without adding risk,” said Rick Durbin, CFP, financial advisor and managing member at Silver Pine Wealth Management.

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Because you should keep an emergency fund liquid in a traditional bank account, it can’t earn interest quickly enough to keep up with inflation.

“The unfortunate offset to having funds available is that those funds will earn little or no interest. Even at normal inflation rates of 2 to 3%, it has been impossible to invest in a way to match inflation,” said Roger Gaddis, CPA, CFP, senior wealth advisor at Gaddis & Gaddis. “With current inflation of 8 to 9%, it is impossible to ‘safely’ earn any income at that level.”

On the plus side, interest rates should be increasing, which may help to pad your emergency fund a little.

“To combat inflation, the Fed will often increase interest rates, so eventually, you can likely expect to see increases in the amount banks are willing to pay for holding cash with them,” said Kevin Ward, certified financial planner and advisor at Moneta.

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How To Account for Inflation

Unfortunately, the only way to account for inflation is to actively save more into your emergency fund — which may be harder to do as costs of nondiscretionary expenses have made it harder to stretch your paycheck.

“Emergency savings is calculated based on monthly cash flow needs, and should reflect three months (married with two incomes) to six months (single with one income) of expenditures,” Silver Pine Wealth’s Durbin said. “Therefore, the amount of emergency savings should be adjusted accordingly.”

Because expenses could be rising monthly, you should recalibrate your savings as needed.

“Stay disciplined in monitoring expenses to assure that the emergency savings aligns with the current needs,” Durbin said.

While you should maintain three to six months of expenses in your emergency fund, in this current climate, you shouldn’t keep any more money than you have to in this type of account.

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“We believe that by not having too large of a balance in your emergency savings fund, you can add the excess cash into the stock market and, to some extent, bonds,” Moneta’s Ward said. “When inflation takes place, we expect over the long term that equities will generally be able to outperform the increase in inflation and costs to your daily living expenses.”

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 

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