3 Reasons Why an Emergency Savings Account May Not Be the Best Financial Move

Here are three reasons why I think an emergency savings account is the dumbest thing you can do with your money. I'm Tyler, a former financial advisor and portfolio manager, and I create financial content for free to help you make smarter financial choices.

1. Limited Unexpected Expenses

According to a 2022 report by the Federal Reserve, 64% of Americans experienced no major unexpected expenses in the previous year. Of the remaining 36%, most reported costs under $1,000. Big whoop—just put it on a credit card.

2. Low Interest Rates vs. Inflation

The majority of you are probably keeping that emergency savings in a savings account earning the national average of 0.47%. With inflation averaging just over 3% annually, you do in fact have an emergency on your hands—you're losing 2.5% of your money per year.

3. Tax Implications

But wait, there’s more. Not only are you losing money to inflation, but you're also getting hit with additional taxes. No, your high-yield savings account is not earning you 4%. It’s earning you 1% post-inflation and 0% post-tax. Back to square one—or square zero.

Better Alternative: Roth IRA

If after all that, you still want an emergency fund, consider opening a Roth IRA. Invest 5% of your money in risk-free assets; this shelters you completely from taxes. Plus, you'll sleep better at night knowing you can take back your contributions at any time, penalty and tax-free. You know, just in case of an emergency.

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