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.
In 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