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Should You Invest Your Emergency Fund?

{ 72 comments }

The following article is from Melanie, our staff writer. Melanie is in the beginning phase of her journey to Financial Freedom and she’ll offer a refreshing point of view for us.

invest emergency fundIn the world of personal finance we talk about emergency funds ad nauseum. Everyone seems to have an opinion about them.

Some people think that people in debt should not have an emergency fund, citing Debt is my emergency!

Gurus like Dave Ramsey encourage a baby e-fund with a $1,000 if you are in debt.

General advice seems to say that having 3-6 months’ worth of expenses are needed in your emergency fund, while more extremists advise having 12 months’ worth of expenses saved up.

Because I am in debt and also a freelancer, I currently have three months’ worth of expenses saved up in an interest bearing savings account. I tend to think I am fairly low-risk. I don’t have a house, a car, pets or kids. I have medical insurance that’s good, but not great. So my main concerns are my unreliable paycheck (though I have pretty reliable clients) and the possibility of a medical emergency.

I have been following personal finance blogs and perusing books for years and the standard advice is to keep your emergency fund in a savings account and don’t touch it. I have diligently kept an emergency fund pretty much my whole adult life — and indeed it has saved me from going further into debt during a bout of medical problems and a car accident.

I have never thought of not having an emergency fund, nor have I thought of having it in anything but cold hard cash in a savings account.

Invest Your Emergency Fund?

But recently I learned that a well-respected person that I admire doesn’t have a traditional emergency fund. Their entire emergency fund is in investments. The thought is that keeping so much cash in a savings account hardly offers any return and barely keeps up with inflation. By investing their emergency fund, they are actively seeing returns. In their defense, they believe you can sell stocks in a matter of days and be able to have that cash fairly quickly.

I have to admit, my mind was blown. Now maybe I’m not following the right crowd, but never in my years of reading and exploring financial advice did I see someone recommend having your emergency funds as an investment.

Then I thought, maybe that makes a whole lot of sense? And maybe this is my opportunity to finally start properly investing?

For some background, I have a paltry retirement account that I contribute a small amount to each month, but aside from that I have no other investments. I know, I know, it’s a tragic state of financial affairs, but I’ve been pretty focused on paying off debt first.

Now I’m totally rethinking my emergency fund strategy and considering withdrawing $2,000 to begin investing and keeping $1,000 in liquid cash. While I love my Capital One 360 savings account, at .75% interest, it’s still quite low on the scale and not really keeping up with inflation.

In an effort to work smarter, not harder this year, I’m seriously considering it. While having big cushions of cash feels nice psychologically, I know that logically I will be getting more out of putting those funds towards investing.

So, what do you think? Should I invest my emergency fund? What are your thoughts on investing your emergency fund?

photo credit: flickr by newleoforex

 

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Melanie Lockert is a freelance writer currently living in Portland, Oregon. She is passionate about education, financial literacy, and empowering people to take control of their finances. She writes about breaking up with debt, freelancing, and side hustle adventures at DearDebt.com. Currently she puts more than 50% of her income towards debt, while living a frugal, fun life. In addition to her love of personal finance, art and music, she is also a karaoke master.

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{ 72 comments… add one }
  • Petra January 19, 2015, 1:20 am

    The stock market has been running nicely these last five years, giving great returns. That’s probably why people are desperate to throw as much money as possible towards it, and now are advocating stocks for an emergency fund, or even are advocating that you should borrow money to invest. Don’t do it. The stock market is volatile. Another bear market WILL happen, and then another one, etc etc. If your emergency fund is in the stock market and it has had a correction of 40%, and you HAVE to take the money out for a financial emergency, then essentially you have single-handedly made that financial emergency much more expensive than it needed to be.

    Keep a decent amount of money in savings for emergencies. Put money you won’t need for at least the next 10 years to work in the stock market. Don’t risk too much.

    • Melanie January 19, 2015, 10:39 am

      Thanks for your advice! Investing my EF is appealing, but you are right, a downturn will happen.

    • Misfit Money February 2, 2015, 1:00 pm

      I have been investing my emergency fund for nearly 5 years now. Luckily, I have had no emergencies that I could not cover with my normal income. Like many, I don’t put it all in the stock market is it is too volatile, and you can never predict when you will need that emergency fund and how that will correlate with stock market levels at the time. However, ff the stock market begins to drop with all signs to pointing to another recession, you sell. You can put stop limits on your open trades and continue to move those stop limits up as your dividends continue to pay out. The goal would be to build up enough payouts to cover the emergency fund or increase it.

  • Mrs SSC January 19, 2015, 2:58 am

    I like the idea of having cash, and I do the same as you…three months in Capital One 360. I used to have six months, but as I became more comfortable with budgeting and investing, I was able to feel more secure with less cash. But, I have a house and two kids, and investing the emergency fund is too risky for me. I know eventually the markets will stop performing the way they have been, and I don’t want to have to worry about losing money in my emergency fund. The way I see it, it is a safety net, parachute, whatever… It’s there to help you in unexpected circumstances…so maybe I’ll lose a little potential profits by not investing it, but I never worry or even think about it not being there for me.

    • Melanie January 19, 2015, 10:42 am

      Hmmm I wonder if I should just cap my EF at 3 months and invest the rest?

  • sharil January 19, 2015, 3:15 am

    Hi mate I am from NZ, I have two rental properties and I keep separate accounts for each. every week when rent comes in and expenses goes out a little is left over and in time it builds up. lets face it your tenants wont uproot in first 3 months, I took my time choosing them and I have had the same great tenants for two years now. I leave minimum $3000 in each account for emergencies and the rest invest back into shares.
    I also have a retirement fund which I can dip into if I get into financial hardship as per the rules. But I also have $1000 for instant emergency and nowadays banks give u interest free and fees free credit card. I have one with $8000 limit which I used when I went for a holiday and now paying off. I rent as a boarder near work and its cheap and functional so I save heaps which I invest. My opinion you cannot let money sit around not earning for you but at the same time we cannot predict when the worse comes. since u don’t have too many expenses maybe an interest free credit card would be ok for you which would allow you to invest all your money but still have a safety net. and if u had to use the card u will still have time to sell a few shares to pay it off. thanks sharil

    • Melanie January 19, 2015, 10:46 am

      Thanks for sharing your strategy! I’m pretty against using an interest-free credit card for emergencies, though I get why it is considered as an option.

  • The Stoic January 19, 2015, 3:52 am

    I think you’re better off keeping your emergency fund in a safe place and use them for what they are intended; an unforeseen emergency. I can understand wanting to get the most out of every dime we have laying around, but having your emergency funds invested is a great way of making that emergency worse if the timing is right. As Petra mentioned above, if the market drops and you have an emergency that requires withdrawing those funds, you will have less principal than initially deposited. It’s a little risky and not risk I think most people would want to take when it comes to funding the unexpected events that occur in life.

    • Melanie January 19, 2015, 10:50 am

      Thanks for sharing! It’s so hard to anticipate for emergencies…but you know they will happen. I do want to start investing though!

  • [email protected] January 19, 2015, 4:27 am

    This is timely; I was googling just this thing the other night 🙂 I’m looking forward to reading the responses. Reluctantly I arrived at the conclusion of Petra and the Stoic — that the market will drop eventually and it’s likely to be right in the middle of an emergency — but, on the other hand, my expenses are quite low, so six months’ worth is only about $6000. If I were keeping $30,000 in cash I’d feel really weird about it.

    • Melanie January 19, 2015, 10:54 am

      My expenses are also pretty low. But I do still have debt and my income is variable. I would never keep 30k in a savings account!

  • Nicoleandmaggie January 19, 2015, 4:47 am

    We have enough delays in getting reimbursements etc, that a 1k emergency fund would mean constant fees for selling stocks, or credit card interest. Or I would have to unautomate some of our saving.

  • LN January 19, 2015, 5:17 am

    I also read something similar about 2 years ago which also blew my mind.
    I have a low risk tolerance, and have lots of financial safety backups, and am also a mom, with a family of my own, and a mortgage. This concept (of allocating too much cash in an emergency fund) made me think about my low risk tolerance, and the fact that I naturally tend to worry a lot. I mean, in a true emergency where our family would need money, we have so many options to come up with money (our own emergency fund, our investments, asking our family for help, our 401k, taking out a loan, getting interest free credit cards, etc.)…. What I ended up doing was allocating less to cash, and actually using the rest to pay down debt and to invest in stocks that pay good dividends. And nothing bad has happened since that decision. And we have been able to invest in even more stocks that pay dividends, to increase our long-term savings which is just a huge emergency fund anyway.

    So you really have to think about what some of your backup plans would be if you truly needed money for an emergency (if you don’t want to dip into the invested emergency fund in a market downturn), and think about the probability is for whatever catastrophe that you are worried about. Do what works for you. I’m so happy to hear that you do have an emergency fund. And you mentioned you don’t have debt, but also think about your other financial goals to see if there is another priority you want to work on, so you can see the bigger picture. And I also believe in reviewing your financial independence strategy periodically to see if it’s still in line with your goals. Our family has a few financial priorities, and we shift our focus every year in order to make progress on each of them.

    Also know that if you decided to put some of that cash into investments and you end up changing your mind, you can always save up the cash again. Life is great like that. There are choices and you are allowed to change your mind!

    • Melanie January 19, 2015, 11:08 am

      I am still paying off debt, which hampers things a bit. I have a ton of financial goals, but debt is my main priority. But I don’t want to completely miss the investing and retirement boat.

  • Radix January 19, 2015, 5:21 am

    If you have enough money in a investment to cover you emergency fund and then some, does it matter what you call it? My investments happen to cover over double what I would consider 6 months of living expenses. So I don’t keep much money on hand since it could easily handle a market drop of over 50% which is more than you typically saw in 2008.

    • Melanie January 19, 2015, 11:11 am

      Interesting point of view. I do believe in the importance of naming and knowing what things are used for.

      • Radix January 19, 2015, 1:10 pm

        I guess that is kinda the point. All of that money is money that doesn’t have a defined use. With all my tax advantaged retirement funds maxed, loans paid off, and no near term goals to save for, the money that gets invested after tax is all unspoken for at the moment, same as my EF would be. Essentially it is easily accessible early retirement money unless some unforeseen emergency comes up.

  • Elias January 19, 2015, 5:24 am

    Investing your emergency fund of $2,000 is a bad idea. An emergency fund is insurance and should be treated as that. The “loss” of yield is the “expense” you pay for having peace-of-mind. You’re in a somewhat fragile position, and don’t have a large enough position to weather out a real storm. The upside of 5% yield next year vs. -25-35% loss isn’t worth the risk IMHO.

    • Melanie January 19, 2015, 11:13 am

      My EF does give me peace of mind — I like what you said about it being an insurance I’m paying for.

  • sendaiben January 19, 2015, 5:26 am

    I’ve been thinking about this a lot recently too.

    In some ways, having a high saving rate is one alternative to an emergency fund: if you are saving a lot each month and something expensive comes up, you can take care of it using the money you were going to save that month instead of investing it. I can’t really imagine an expense we couldn’t take care of that way, and if something did come up I’d just use credit cards as temporary cash flow as mentioned by another poster above.

    So I guess I don’t feel an emergency fund is ALWAYS necessary 🙂

    • Melanie January 19, 2015, 11:15 am

      I do think an EF is necessary, but to what extent? It’s so hard to know.

  • Taylor Lee January 19, 2015, 5:33 am

    I’d consider keeping my EF in a CD ladder (rates too low right now for it but maybe someday…) or in a bond ladder. Definitely not stocks.

    • Melanie January 19, 2015, 11:17 am

      Thanks for sharing your thoughts!

  • SavvyFinancialLatina January 19, 2015, 5:54 am

    I only invest in stocks with money I don’t plan to use for at least four to five years. That is the guidance one of my mentors gave me. I keep my emergency fund/savings account liquid in cash.

    • Melanie January 19, 2015, 11:21 am

      It’s tough for me to imagine money I’ll need in five years. I want to put everything to debt and start saving and investing more. It’s a balancing act for sure .

  • kammi January 19, 2015, 6:00 am

    Leave your emergency fund as is; why it’s called an “emergency fund”. You just never know what will come up. I have an inherent mistrust of each financial system (you never know what will happen to each or even a country’s monetary system, etc) so I try to keep each of my accounts (brokerage,CD, liquid cash, etc) like hands that don’t know what the other is doing. And I re-balance when I get more $$ in terms of the percentages I have already established. I was reading about this guy the other day who had 250K and lost it all at 40 because he thought this ONE investment seemed great (and promised him a greater return), only to see the words “Ponzi scheme” later on affiliated with the company. At 41 he is back in the job market because of it. Um..no thanks.

    • Melanie January 19, 2015, 11:23 am

      Yikes! That’s crazy. I definitely want to be smart about it. I’m thinking of just keeping my EF as is, but invest future money that would continue to pad it.

  • humblefi January 19, 2015, 6:06 am

    Emergency fund, as most others have commented, should be the least risk investment…keeping it in cash is the most sound idea.

    But, you have Capital One 360 at .75%. I have split my emergency fund into three online banks…risk reduction as well as better rates.
    + SmartyPig: 1.0%
    + Ally Bank: .90%
    + Capital One 360: 0.75%

    So, you may want to explore getting some extra dollars for the cash by using one/both of the above.

    • Melanie January 19, 2015, 11:25 am

      Thanks for the advice. I’ll definitely check out SmartyPig.

  • Crass Cash January 19, 2015, 7:11 am

    I’m all for this, but you need to set some strong scenarios as to when you do it. Yes the money can be liquidated quickly if you need it, but what happens when the market drops 50% and you then need it and are forced to sell.

    Therefore, I think you should hold onto it and only invest a certain portion on the “dips” meaning only put 1/3 of it into stocks when the market drops by 20% and if the market drops by 50% you should all of your money into it. Just a suggestion…

    • Melanie January 19, 2015, 11:27 am

      Yeah, those drops are what make it scary!

  • Jon January 19, 2015, 7:13 am

    At the end of the day, you have to decide if investing your emergency fund is right for you. For my wife and I, we have a large emergency fund in cash because of her upbringing. Having a large cash cushion gives her comfort. If it were up to me, we would have $5K in cash and the rest of the emergency fund in short-term bonds. If an emergency arose, we could put it on a credit card, then sell some holdings and have the cash within a week to pay off the credit card. But, you have to do with what makes sense for you. What works for one person might not work for another. And if you are married, come to a compromise that both of you are happy with.

    • Melanie January 19, 2015, 11:30 am

      I definitely think it’s important to do what helps you sleep best at night! I used to be a big fan of hoarding cash, but now I realize that paying off debt and investing can make my money work harder for me. It’s definitely a personal decision and one I am not taking lightly.

  • whizbo January 19, 2015, 8:31 am

    You might consider building a t-bill ladder. As long as life is beautiful you can just continue buying new t-bills as the old ones mature. If something comes up, you’re money is only as far away as your next t-bill mature date. You can design the ladder to have bills mature at whatever frequency you like. However, to get decent rates these days, you have to build a pretty long ladder. Here’s an example that google found fro me. http://www.mymoneyblog.com/how-to-build-a-treasury-bill-ladder-a-visual-guide.html

    • Melanie January 19, 2015, 11:34 am

      Thanks for the helpful example! I’ll look into it.

  • Todd January 19, 2015, 9:39 am

    I invest 3 months worth of essential expenses into I-bonds. You can invest through Treasury Direct. If you never need the money you can use these as a college savings tool as interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions). You have to invest your money for a minimum of one year, so this is a good option if you can take the risk you will not have an emergency in one year. Also, they have an automatic purchase tool so you can send a minimum of $25 a week if you like; this is a good way to start an emergency fund with a balance of $0. http://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

    • retirebyforty January 19, 2015, 10:32 am

      I think I-bonds is a good idea too. She can invest a little at a time until she builds it up to $3,000. Maybe over a year. It’s a safe option considering the uncertain nature of being a freelancer.

    • Melanie January 19, 2015, 11:36 am

      This is very helpful info, thanks! The RB40 community is so smart 😉

  • Kalie January 19, 2015, 9:53 am

    This is an interesting idea that I hadn’t considered before. I guess the trade-off with higher interest rates is more risk (and sometimes less liquid). Sounds like you don’t have a lot of risk, though. We are planning to use some of our emergency savings to finish paying off our mortgage (when we get to the end). While it won’t be liquid at all, our living expenses will be much less, and we should be able to repay the savings quickly once we’re not paying a mortgage.

    • Melanie January 19, 2015, 11:39 am

      It will be nice to be mortgage free! You can then save and invest that money. That’s why I’m so excited to be debt free — so I can put 1k each month to saving/investing/goals.

  • LeisureFreak Tommy January 19, 2015, 9:56 am

    I believe you should leave it in cash now. As others commented there will be one day a market correction and you don’t want your emergency fund in that. Investing is long term and “knock on wood” your emergency fund may sit unused long term you never know when it will be needed. Once you have you have saved the total amount planned for the e-fund then you have plenty of time to save for the long term in investments. If there comes a 40% or 50% market correction, then ask this question again because it might be the time to take advantage of having that cash.

    • Melanie January 19, 2015, 11:45 am

      Yeah, investments shouldn’t be touched and having my EF there would presumably mean I’d touch it eventually.

    • Melanie January 19, 2015, 12:04 pm

      Yeah, I wouldn’t want to get into more debt because of an emergency. Maybe I just need to wait — patience is not my strong suit 🙂

  • Ben Luthi January 19, 2015, 10:13 am

    I’ve gone back and forth on this one quite a bit. Part of me wants to wait until we have a bigger buffer than we do before I start investing it. I definitely think it’s a smart decision, though.

    • Melanie January 19, 2015, 11:47 am

      I know, it’s so hard to know when it is right.

  • Joel January 19, 2015, 10:20 am

    I invest my emergency fund, not in stocks mind you, as these are more risky, but in muni bond funds. These can be lower risk, have tax advantages, and can still give a fairly good return, at least beating inflation.
    I have a 4 plex and a duplex so I like to keep 10 – 15k in case of emergencies, well, to me, keeping that amount of money in a savings account is a waste of time and earning power.

    The only downside to these funds that I’ve come across is they can have front end fees, so you need to put in smaller amounts at a time leaving your with some cash in case emergencies happen in the first few months while the money climbs up to being in the black again. They’re also about 2 days liquid, most emergencies you can get away with having to wait a day or two in my experience.

    • Melanie January 19, 2015, 11:49 am

      Thanks for sharing your experience. I’ll definitely look into muni bond funds!

  • [email protected] January 19, 2015, 10:20 am

    I don’t have a lot of numbers to back up this thought process, but here is what I’m thinking. When do most people need to dip into their emergency fund? Probably when someone loses a job. When do most people lose a job? Probably during a recession. What happens to the stock market during a recession? It probably will go down.

    I keep my emergency fund at Lake Michigan Credit Union in a checking account that gets 3%. So I still have cash available, but my money is also working for me.

    • Melanie January 19, 2015, 11:50 am

      I like your logic! I should check out my local credit union’s rates.

  • Tawcan January 19, 2015, 1:08 pm

    I think investing emergency fund is OK but it needs to be something safe. Investing in stock makes very little sense considering all the risk. Last thing you want is to have emergency fund tied in stocks and forced to sell when the markets are down.

  • [email protected] January 19, 2015, 1:49 pm

    I’m in a similar situation as you in that I’m in debt and clawing my way out. As for the emergency fund, I’d have to go with the wisdom of the crowds above and say that the risk mitigation/reduction that the e-fund provides is worth the expense of lost returns/opportunity costs. With my emergency fund, I want as low of a risk and as much liquidity as possible.

    The loss of returns may hurt a bit now, but 10 years down the road it will be but a small portion of your overall net worth.

  • CheapMom January 19, 2015, 3:12 pm

    Go for it! Having 3 months of expenses not keeping up with inflation is a bit of a waste. I’m no expert, but I think you’d be ok as long as you could get access to your money in case of emergency. You might want to shy away from riskier investments because your emergency fund won’t necessarily be able to weather the ups and downs of the market.

  • papadad January 19, 2015, 4:44 pm

    Keep the emergency fund in cash.

    Wait til stories like “the big market crash” and “here we come recession” are on the cover of Time and Newsweek… if you still have the stomach to invest your EF, only THEN would i consider investing a portion of the 6 month EF into the stock market. I would never dip below 3 months in cash…ever…unless of course i used it for an emergency.

    me personally? I keep 1+ years (yes, years) of basic expenses in cash.

    In down economies, cash truly is king. Period.

  • Jamie January 19, 2015, 6:06 pm

    In a nutshell…

    Pay the debt as fast as you can. The hell with the emergency fund, you emergency is yelling at you through a high interest rate loan.

    Once you pay that off, start investing your money… try saving 50% of it. Use a credit line as your EMERGENCY FUND. If you have 10k put away in some investments and you suddenly need 2k. Use the credit line and pull out 2k from your investments even if the stock market dropped, 10k to 2k is highly unlikely in any bear market especially if you are diversified accordingly.

    Cheers,

    Jamie

  • BE Pennypacker January 19, 2015, 6:07 pm

    I like leaving my emergency fund in a liquid savings account. Sure it doesn’t earn a whole lot, but I try not to think of it as a moneymaker. It’s more like a safety net that I’ve purchased to keep me from falling.

    Investing my EF would just be too risky. I wouldn’t want to have to sell my investments at the wrong time (e.g. during a market crash) just to get myself through a crisis.

  • Dividend Wisp January 19, 2015, 10:04 pm

    Hi Melanie! Whether or not to invest your emergency fund is definitely an interesting topic. Personally, I try and keep a decent balance of cash in my banks chequing account for a month or two of expenses. From there in my savings account at my brokerage I have the mentality that my one Exchange Traded Fund(ETF) position is my backup cash if I absolutely need it. My stock positions however I do not want to touch at all. I like using the ETF as my emergency’s, emergency cash since it has a much better yield than cash does, pays monthly like interest and my brokerage has free ETF purchases so that I can slowly add to it as I can. The only downside is that it would suck to every have to sell an income generating asset, especially if its in the red at the time. But I guess that’s the risk taken from not having it in cash.

    Hope you figure something out that works for you!

  • Rachel January 20, 2015, 6:02 am

    We do this. We have 1 month of our emergency fund in a savings account, ready to go at a moments notice. We have an additional 5 months invested in a fairly low-risk mutual fund with Vanguard. Hopefully, we never need to touch that money and it just keeps growing at a moderate pace that keeps up with inflation. But if a really big emergency did crop up, we could use the savings account for the immediate problem and cash out the mutual fund within a few days to cover the rest.

    It’s worth noting that we only began to do this once our monthly cash flow had some wiggle room to cover little “emergencies”, like needing a new tire, by putting a bit less in savings that month instead of raiding the e-fund. Now our e-fund is for true emergencies, not just any minor unexpected expense.

  • Chadnudj January 20, 2015, 7:05 am

    My two cents? It’s fine to invest your emergency fund, but if you do, you should have DOUBLE the emergency fund you would normally have if you kept it in cash. That way, if the market is down 50% when you have an “emergency,” you’ll still be okay.

    So if your 3 months of living expenses emergency fund was $10k, I’d only invest if I had $20k — that way, even if the market tanked, I’d still have enough to cover 3 months of living expenses.

  • Justin January 20, 2015, 8:46 am

    I’ve decided that I’m for having your EF in something other than savings. Bonds could make sense here. I also like what someone said about having some portion in cash and the rest invested in something low risk. We chose to use Betterment for their low cost index approach that keeps you from making bad decisions.

    Our family has an EF of 6 months of expenses. Like you it was in low yield savings 360 account. Ours is probably close to $40k or so. I never liked the idea of having that much cash getting eaten up by inflation.

    I’ve been investing for many years so have a basic understanding of stocks, bonds, etfs, expense ratios, etc. Enough so that I’m not simply afraid of the unknown. I’ve also learned that picking, buying, and selling stocks is an emotional thing that can get you in trouble if you aren’t careful. I’m an advocate of boring set and forget low cost index investing. No fancy strategies, market timing or stuff like that.

    Here’s what we did recently. We moved the EF and other short term savings money over to Betterment. They fit my style to a T. Low cost, set and forget, and keep you from making bad decisions. They have a great site, mobile app and make it super easy to set up goals like Vacation, Emergency, Next Vehicle, etc. Whatever you want. Then they walk you through choosing the target amount and when you want to get there. They then use all that info to suggest a stock/bond mix that suites your needs for that goal. Emergency Fund 90% bonds / 10% stocks. New car in 10 years. 50/50. Whatever you want. Then they link up to your checking account and help you set up auto deposit so you are all set on auto pilot and the money will be there when you need it.

    They aren’t the only game in town when it comes to low cost, index, robo investing. There’s Personal Capital. They have a great tool that will track every account you have in one place. That’s their free product and it is really good. They make money like Betterment. From investing and managing your money for you.

    There’s also Wealthfront. They are similar to the other two when it comes to their investment strategy.

    I checked them all out and chose Betterment for my family. If you refer 3 people you get a year free. I’ll leave off my referral link so as not to seem too much like a sales pitch. If anyone wants it to help me out, just ask.

  • retirebyforty January 20, 2015, 10:19 am

    I don’t think it makes much sense for Melanie to invest her EF. She’s a freelancer and the work can be unstable. It’s good now, but they can dry up during a downturn – at the same time the stock market drops.
    Even if she makes 10%, it’s only $300.
    Invest in bond or CD would be fine, but the rate is not much higher than a saving account. Probably best to just leave it in the saving account.

    • Ben Hubbard February 2, 2015, 1:13 pm

      It is a tough topic partially because emergencies are not something we like to think about. Unfortunately, we must. We need to consider the types of emergencies we are looking to cover. If we are talking catastrophic emergency, 3-6 months of cash is not going to be much of a help (Major medical diagnosis, lawsuit etc.). So really we are talking about “minor” emergencies. Car wrecks, broken bone, badly ill child etc. The average cost of those events with insurance coverage is probably in the range of $2-3k depending on severity. I agree that for a smaller value of money like $3,000 that investing has more downside than upside for this purpose. I agree with Joe, keep it in cash until you build up more funds and can feel more comfortable.

  • Max January 20, 2015, 10:24 am

    I’ve always aired on the side of caution, then I started investing most of my extra money and keeping an emergency fund of $5-10k. Now that it has gotten much bigger than that, I normally wish I would have it invested, but I’m saving in the next few months to hopefully buy another real estate rental so I need it more liquid. If I wasn’t planning on buying a real estate property I’d probably invest the majority of it and leave a bare margin for vacancy, maintenance, repairs, emergencies, etc.

  • Robert January 20, 2015, 11:23 am

    I think that you should absolutely invest your emergency fund, with some caveats. You need to come up with a conservative “valuation” for your brokerage account, to account for market fluctuations. Some would say 60% is a good number. This means that you would “value” your brokerage account at only 60% of the funds invested, to account for the possibility of a 40% market crash. So if your monthly expenses are $2000, and you want a 3 month reserve fund, you need to have $10k invested ($6k “valuation”).

    And of course, another topic is what you should invest in. It should be a well diversified mix across several asset allocations. And ideally, some dividends would be great, so you can really feel the value of beating that 0.75% return from your savings.

    With this strategy, you’ll have your emergency fund intact, and you’ll also be able to supplement your income with the growth and dividends that you earn.

  • Nina @ RichLife.io January 20, 2015, 2:52 pm

    I wouldn’t do it, simply because I might need to withdraw when the markets are doing bad and that would mean the losses would not get recovered. I’ve set a number on mine, anything that I save extra gets invested, and when I draw from it then I top it back off and continue investing the rest.

  • Evan January 20, 2015, 5:06 pm

    One thing you should take a look at is if you’ve ever had an emergency situation, or if not, make up an emergency situation and think about all of the contingencies you already have in place. For example, what would you do if you lost your job? Or were being sued for $5,000?

    There are a lot of options outside of your emergency fund. What type of work could you find quickly? Would you be able to rent any space in your house or apartment, or use Airbnb? Do you have family or friends that would help you out? Do you have a credit card that could help you bridge gaps?

    For most, true emergencies are few and far between. Yes you are taking a risk investing your emergency fund, but if you have other contingencies in place, you may be safer than you think. Ultimately you should determine the amount of money you would need in a true emergency and utilize something safe as others have described. But make sure this number is inclusive of all the factors I mentioned above, and any others you can think of. Outside of that, add to and grow your investments to the point where an emergency fund isn’t really needed, as your friend has done. Or pay down debt depending on your situation.

    The only reason you would come out hosed using this plan would be if you have an emergency in the very short term. What fall back options do you have?

  • Squirrelers January 20, 2015, 7:02 pm

    I’d say that 6 months worth of expenses in an emergency fund, if that’s the minimum that one wants to keep, should be in cash. Anything further than that? Why not consider investing.

  • Ben January 21, 2015, 9:47 am

    It is tough too for me to only earn less than 1% on my emergency fund, but I think of the emergency fund as something that reduces my risk. I think of it as insurance. I’m willing to take a very low return on my emergency fund as the price of this insurance. I want the regency fund to be there no matter what. It’s also good to think in terms of a complete market cycle. If we were talking in 2008-09 and stocks are down significantly, I don’t think you would consider putting your emergency fund in stocks. That’s how it works for me.

  • Andrew January 22, 2015, 8:34 am

    Interesting topic because it has been on my mind lately. I think it depends on the circumstances. When you are more secure, I think it does make sense to invest your emergency fund. Basically all my money whether it’s in a bank account or investments is my emergency fund. I don’t need to have a label for it and it doesn’t necessarily have to sit in a bank account earning pennies.

  • Justin January 23, 2015, 7:21 pm

    Now that savings account interest rates are not keeping up with inflation, I have changed my strategy a bit with the Emergency Fund. I have paired it down so it floats between 10K and 20K throughout the year. The key is to have a lower floor where you will not go under and also an upper ceiling where you know your money is not working for you at today’s rates.

    Month to month I will remove funds and put them into dividend paying stocks that are not extremely risky. Dividends are always re-invested. This strategy has worked well to keep a decent e-fund, and slowly built up a sizable stock portfolio in taxable accounts without any early withdraw penalties.

  • Maarten October 2, 2015, 7:07 am

    I invested my emergency fund in SPY, wrote about it in my book and got a lot of push back on it. Keeping a 6 to 12 month EF in savings is stealing from yourself. Inflation will eat at it. The main arguments you always here are, EF should be liquid. Googling that you’ll find many definitions. Investopedia actually calls most stock liquid assets. If with liquid you mean easily accessible then I’d argue that I can get to $30,000 from my broker account as fast as I can get it from my bank.
    As for the second argument that the market will go down, every one always seems to ignore that the market goes up in the long run. First of all, it takes years to build a 6 month EF so those years already incorporate unrealized gains. Even if the market goes down the day before you need your first 2K out of your EF it is probably covered by unrealized gains.
    Secondly, emergency funds can sit around for years, unused. a 30k EF will actually turn into 80K if not needed for the next 10 years. Imagine what inflation does to a 6 month EF in 10 years at a modest 2% inflation.
    I’ll be happy to take the heat for investing my EF. I just paid 12K in medical bills selling shares I paid 9K for. And this with the market in a 7% correction.

  • Markalex May 11, 2016, 11:09 pm

    Keep the 3K, at least, in cash. The opportunity cost is at most $300 in a year. The cash fund let’s you pay for the unexpected quickly and without the negative feelings of cashing in investments, especially if they are down. The small (300-3000 dollar) emergency comes up pretty often (cars, medical, layoffs, unexpected trips for family emergencies, accidents, computer dies…). It makes life so much less stressful to know you have that covered. Now you can put money in investments that would cover the bigger emergencies and to grow your wealth. You will enjoy the trip more with the strong foundation of your emergency fund.

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