For an answer to the first question, I will need to go back and read my own post on why I shouldn’t touch my emergency fund.
For the remaining two questions, I did a little research and my findings are somewhat comforting.
Calculating the “Real Interest Rate” is just as important as what interest rate you are currently receiving. This is rarely ever talked about by individual investors, but is important to know. Here is the formula:
Real Interest Rate = Current Interest Rate – Inflation
Note: Please don’t share this formula on any first dates.
"Hi, I'm date Mike. Pleased to meet me. You wanna hear the formula for the real rate of return?"
As of today’s rates, I am earning only 1.1% on my savings account (This is what’s making me depressed.)
However, the average annual rate of inflation over the past 12 month is an average of .025%.
Source: http://www.usinflationcalculator.com/inflation/current-inflation-rates/
Therefore, my real rate of return = 1.075% (1.1%-.025%)
Let’s compare this to 2008 when Money Markets were averaging 2.89%. Inflation that year averaged 3.8%. My real rate of return, -0.91%. Even though my money market made nearly 3% on average, I was really losing money based on the rate of inflation.
If you don’t believe that inflation has been eroding your buying power, use this calculator on the US Bureau of Labor Statistics website. http://data.bls.gov/cgi-bin/cpicalc.pl
Though our emergency funds are not making in a lot of interest, I can feel better knowing that my real rate of return is in the black.
When (I didn’t say if) inflation kicks up (just wait for the employment numbers to start improving) we may be having a completely different conversation on what to do with your emergency fund. Even more of a reason to continue following this blog.
