There’s a ton of information out there on emergency funds and why it’s important to have one. It is recommended that you save between 3-6 months of your expenses in a cash emergency fund in case you need the money. It’s important to remember that having an emergency fund is only one way to prepare for unforeseen expenses, so it’s a good idea to review your insurance coverage and create a budget.
Suze Orman recommends saving as much as 8 months in an emergency fund. I don’t think it’s a good idea to keep your money on the sidelines since you could be using it to build wealth. You can use the money to invest in stocks or mutual funds, which have a better return than saving it in a bank account.
There are better ways to protect yourself against emergencies than putting a lot of money away and missing out on the chance to grow it over time. Investing your money in a diverse portfolio of stocks, bonds, mutual funds, and other investment vehicles can provide you with a steady stream of income over the long term.
For a different perspective check out the Millennial Money Minutes podcast we did on rethinking emergency funds:
Even if you use a high-interest Ally Bank account, you are still only getting 1% return on your money because no one is growing your money in a savings account. Over time you are actually losing money because this isn’t enough to keep up with inflation. If you want your money to have the same value over time, you need to regularly increase the amount you save. For most Millennial investors it actually makes a lot more sense to start investing the money in your emergency fund. Because of the effects of compounding interest, the more money you invest now, the more it can grow over time.
Should You Invest Your Emergency Fund?
When researching whether or not to invest my emergency fund, I probably read through the first two pages of the internet, but couldn’t find a real answer to my question. Determining whether it makes sense to invest your emergency fund depends on your life circumstances. It’s important to understand that there is no one-size-fits-all answer when it comes to investing your emergency fund, so it’s wise to make a decision based on your own financial goals and risk tolerance. To help you decide, I will give you my own experience and highlight some of the scenarios where investing your emergency fund makes sense. It is important to remember that everyone’s financial situation is different and so the decision to invest your emergency fund should be taken with caution.
I have been a saver for the past 5 years and my first goal was to build an emergency fund to cover 6 months of my expenses. I am proud to say that I have achieved this goal, and am working towards my next important financial goal. So that is what I did – I put the $30,000 into a high-interest rate Ally bank account. I plan to use the money for a down payment on a house. When compared to the returns generated by the stock market over a 3 year period, my $30,000 turned into $31,000, which is a terrible return. If I had invested in the stock market instead of leaving my money in a low-interest savings account, I would have made more money. I missed out. I missed out on a great opportunity because I wasn’t able to participate.
I would have made a lot more money if I had put that $30,000 into something else. The old adage “knowledge is power” proved to be true in this situation and I should have done more research before investing. I would now be worth about $90,000 if I had purchased Facebook stock. I am thankful that I was able to make a return on my investment in other stocks. Now I am not recommending you use your emergency fund money to buy Facebook stock, or any stock for that matter – I am highlighting that I could have achieved better returns with my emergency fund. I could have seen greater growth if I had invested in the stock market instead of keeping my emergency fund in a savings account.
If I had taken advantage of the growth of most of the US equities market and put my $30,000 into a low-cost index fund, my money would have grown into approximately $46,000. Over the same time period, my emergency fund earned $1,000. Critics would argue if you needed that money in the past. What if you had an unexpected expense? If you had money invested, what would you do in an emergency? I would have had to take out a loan or borrow from family or friends in order to get the funds. That is the key question. Do you have the answer?
I made a mistake with my emergency fund. I plan to save up a larger emergency fund so that I won’t have to worry about unforeseen expenses in the future. I had a lot of other ways to cover an emergency that I didn’t need to have my money sitting earning low returns. I wanted my emergency fund to be ready to use should I ever need it.
How do you know if you are ready to invest your emergency fund?
Use the checklist below to help you decide and ask yourself honestly if you have most of the following (the more you have the more likely you should be investing your emergency fund):
- Stable job is one of the reasons most people keep an emergency fund. If you feel that you have a stable job or that you work in an in-demand job, then you can probably invest all or at least part of your emergency fund. It’s important to research the best ways to invest your money so you can get the most out of it. If you lost your job in digital marketing, you could probably walk across the street to get a new one. Even if you don’t find a job immediately, you shouldn’t have a hard time finding a new position soon. How important are you to your company? What do you do? The demand for skilled workers in this field is growing rapidly, so now is a great time to get ahead and make sure you’re at the top of your game.
- Additional income opportunities : A lot of young people are hustlers and can find additional income opportunities if they look hard enough. It’s an exciting time to be alive, with so many opportunities available for those who are willing to put in the effort. If you needed money for an emergency, you can take advantage of these opportunities. It is possible to set aside money for a rainy day so that you are better prepared for any unforeseen expenses. You can always find new ways to make money if you get creative, such as starting a dog walking business, selling your stuff on eBay, or becoming a writer. Taking on a side hustle like delivering groceries, tutoring students online, or offering virtual assistant services is possible. You can find additional income opportunities on popular websites like Upwork or Taskrabbit. Short-term investments or side hustles can be used to create a steady stream of income. If you need money for an emergency, what can you do?
- Investments you could sell if you needed : It’s not a good idea to take money out of your investments, but it’s still yours if you need it. You should always think about the consequences of withdrawing money before making a decision. If you have non-retirement investment accounts, take money out first. If absolutely necessary, you should only withdraw money from your non-retirement investment accounts, as this can have a negative impact on your financial future. If you run into an emergency and own some stocks, it’s a good idea to sell them first. It’s important to remember that retirement accounts are usually set up for long-term savings and it can be difficult to make up for the losses incurred from early withdrawals. If you need money out of your retirement accounts and have money in a 401k and Roth IRA then take the money out of your Roth IRA first – because you can take out the money you have directly invested (not the gains) without a paying a penalty. If your employer allows, you will have to take a loan from your 401(k) to take money out of it. It is important to speak with a financial advisor before taking out a loan. If you ran into an emergency, what investments could you sell? If you decide to sell your investments in an emergency, you should always be aware of the risks.
- Quality insurance coverage : Some emergencies might be covered by your insurance or credit card. If you get into an accident or a tree falls on your car, you will be covered by your car insurance. If you have good car insurance, you may be covered in the event of theft or vandals. If you purchase something with a premium credit card, it might be covered if it gets damaged or lost. Premium credit cards will provide you with purchase protection in addition to covering the item if it gets damaged or lost. In the event of an emergency, keep track of all of your insurance coverage in one place. If you keep track of insurance information, you can be prepared for any unforeseen events. What emergencies are covered by your insurance?
- High credit card limits : It is not ideal to put emergencies on a credit card, but if you have a stable job and meet other criteria, you will likely be able to pay off your balance each month or in the worst-case scenario, you could carry a balance for a month. It can be difficult to accumulate credit card debt, but if you have a plan in place for repayment and remain disciplined it can be a viable solution in an emergency. One of the best ways to use credit is to use your credit card for emergencies, as it gives you a cushion if you need it, while your own money can stay invested earning interest and compounding over time. If you can use the emergency funds to pay off your credit card balance in full each month, you can take advantage of the convenience of having a credit card. If you use your cards as your emergency fund, be careful not to get too far ahead of yourself and make sure you have the ability to pay off your cards relatively easily in the next few months. It’s always a good idea to have a backup plan in place, such as setting aside a portion of your monthly budget to pay off the credit cards quickly.
I want you to not make the same mistake that I did. I hope you can learn from my experience and not repeat it. The money that used to be my emergency fund has grown a lot over the past few years. I look forward to seeing what the future holds for my investmentsas I am proud of the progress I have made. I keep a small amount of cash on hand, usually only one or two paychecks, which is enough to cover a few months of my expenses in my checking account. I invest excess funds in a savings account in order to reach my financial goals. I have a variety of investments including real estate, stocks, index funds, and even a small art collection. I’m always looking for new ways to grow my investments. The key to building wealth is to make sure my money has the best opportunities to make money. To reach my financial goals, I’m researching different investment strategies and planning how to best use my money.
What about you? How will you invest your emergency fund? You should invest your emergency fund in a safe and secure option such as a savings account or money market fund so that you can access it quickly in case of an emergency.