Should I invest my emergency fund?
Where should I keep my emergency fund?
Should I invest it since my savings account really doesn't pay a ton of interest? I've heard these questions and many more when it comes to saving for the inevitable financial surprises that we will all face.
So let's answer the question should I invest my emergency fund first. If you aren't familiar with the term, an emergency fund is really just an amount of money that is set aside, typically in a savings account that you can pull from in the event of an emergency, like losing your job or some huge unexpected medical bill popping up in your mailbox.
Your emergency fund should hold at least six months of your necessary expenses which can be a pretty large amount of money, I mean we're talking about tens of thousands of dollars and this is why many question whether this money would be more productive being invested instead of sitting in an old dusty savings account.
Now this is a valid question, since the stock market historically provides returns near 10 compared to the sub 1 interest rate you're probably getting on your savings account, but here's the important thing to keep in mind, if an emergency were to happen and you needed let's say two thousand dollars, you want those funds easily accessible and safe from the risk of the stock market.
Now I’m a strong believer in investing, I think we should all be investors, but investing does have its risks especially in short time frames. So yes historically the stock market provides returns of 10 percent but that's an average, it doesn't mean that the next three years are going to be great. The market might be down 2 next year, up 2 the following year, and then fall down six percent the year after that and this is only to have the fourth year be great and earn 20.
This volatility is why it's great to place your emergency fund somewhere stable like a savings account where yes, the returns are going to be much lower, but you can depend on that money being there and available for you when you really need it.