You have likely heard someone talk about investing their emergency fund, whether you are actively involved in your finances or otherwise.
A fund for an emergency is a simple account that you can use to save money in the event of unforeseen circumstances, such as a sudden illness, job loss, car or house repairs, or other financial issues.
Several finance experts recommend that you save a few month’s worth of expenses. I’ve heard anywhere from three to twelve months.
Although I agree that having an emergency fund is a good idea, most of the discussion about it revolves around how you should save for emergencies.
If you want to build real wealth and achieve higher savings goals, then you will need to put this money to work.
Table of Contents
Your Savings Account and Emergency Fund
Is Investing Your Emergency Fund A Good Idea?
What should I do with my emergency fund?
How to Invest My Emergency Fund
Investing Your Emergency Fund Is Personal
Your Savings Account and Emergency Fund
Most publications and experts will tell you how much you should save, as well as that you must set it aside.
Although I agree that you should have some cash on hand, putting this money to one side is a bad idea.
Start investing your emergency funds if you want to build your wealth and grow your networth.
We’ll talk about that in more detail later.
Why not just put this money into a savings account instead?
It is not wrong to have a savings or cash reserve account. I keep a small amount of money aside for my immediate needs. However, the majority of my savings are not.
Why?
The interest rates on savings accounts are pretty low. Online banks may offer you returns of up to 2%, but most banks only give you a fraction of that.
See how low interest rates can go by looking at these images below from ValuePenguin. The interest rates at my banks are even lower than those of a credit union. However, they offer other benefits, so I have let it slide.
Average Interest Rates
Interest rates on Savings
It’s not a pretty site.
If you invest your emergency fund in the stock market or index funds, the average is closer to 6-8 percent, and can even be higher depending on the performance of the market.
This section is here to help you understand the risks involved in investing your emergency fund.
CIT Bank is a good option if you’re looking for an online bank account that offers high interest rates. Find out more about the savings builder and decide if this is for you.
Is Investing Your Emergency Fund A Good Idea?
You should first be able check off some items before you invest your emergency fund in the stock market.
I have mentioned this before, but I still think that having a little money in an account to be able to access it quickly is smart. (I do). Don’t go all-in with your savings.
If you meet the criteria listed below, I believe it’s time for you to invest a portion your emergency fund.
- Understanding the basics of investing
If you don’t have basic knowledge of investing, I wouldn’t suggest investing your emergency fund.
It is important to have a solid understanding of index funds and individual stocks.
There are many online resources that can help. Consult a financial adviser, an accountant or someone who understands finance well.
Be cautious about the stock schemes that promise quick riches. When investing in your emergency fund, you want to avoid exposing your money to excessive risk.
- Job security and stable income
If you are self-employed or freelance, or your income is variable (you may lose your job), you should have an emergency fund.
If you are in a good position, your business is performing well, you have a stable income, or you’re in high demand, you may want to invest your emergency fund.
It took me several years before I began to invest a portion of my emergency fund.
Once I felt that my job was more secure, I began to invest more from my emergency fund.
- You have a side gig
Before I started investing my emergency fund I did a lot side work and freelance work.
It helped me save a good amount and provided a financial cushion if I lost my full-time job.
Invested Wallet, my side hustle, is currently making me money. It is good to have a second source of income in addition to your main job.
- You don’t live paycheck to paycheck
This is also true if you have a steady job or a side hustle. If you’re not living paycheck-to-paycheck, it might be time to start investing.
It’s ok if you live paycheck to paycheck. I did for nearly five years following my graduation from college, and could not save any money.
It was not worth the risk, especially since I had to spend almost every dollar in order to survive for a month.
If you have reached a point where you don’t worry about money and you can afford the necessities of life, it is time to invest your emergency fund.
- Credit limits
While I do not recommend getting into debt with your credit card, having a good credit limit on your card will give you peace-of-mind.
You can use your credit card in an emergency or if you are stuck. You can pay the credit card off quickly if you have some money saved up and invested.
Be careful to not rely on your credit cards too much. You could end up selling your emergency fund or getting into so much debt that you cannot pay even the minimum.
What should I do with my emergency fund?
Where can you invest your emergency fund now that you have the criteria to meet?
Choose the best investment account for your needs and the most suitable financial institution.
Here are a few solid options for your investment:
Vanguard
Charles Schwab
Fidelity
Betterment
Wealthfront
Index funds and ETFs are great investments for your emergency fund.
It’s important to be aware that, if you invest through a brokerage account, you could have to pay taxes at the end the year for any capital gains or dividends.
Brokerage accounts do not offer the same protection as an IRA or Roth IRA. There are tax-advantaged funds that may help you reduce your taxes.
How to Invest My Emergency Fund
Now that we’ve discussed how to invest your emergency fund, let me explain a little about my own investment strategy.
Vanguard is my go-to for all of my investments because they offer low fees and some of the best index fund options. You can choose whatever suits you best (see the list above).
Here is my breakdown of each paycheck.
Each paycheck, I save 15%.
I need cash now and to have quick access at my bank.
It can take up to 2-3 days for the funds to be transferred back from your brokerage account.
This can be a good option if you are in a hurry to get cash. After I had built my emergency fund up to six months, I started only contributing 15% of each pay period.
My Vanguard brokerage account receives 30% of my money in the form of a VMFXX fund.
Although the interest rate isn’t as high as a bank, I get a higher monthly return.
This money is being divided into Vanguard Tax Managed Balanced Fund Admiral shares, an index fund that manages taxes.
Tax-managed index funds VTMFX are designed for growth of 7-8% with a lower risk, and a more efficient taxation on gains.
There are many other ETFs and funds that don’t require such a high investment.
If needed, these index funds can be sold quickly with only minor tax consequences.
Are you looking for the best Vanguard funds to use for your taxable accounts? You should read this article.
The remaining 55%
I invest my other income in my Roth IRA, since my company currently does not provide a 401k, a checking account to pay bills, and a small cushion for spending.
Investing Your Emergency Fund Is Personal
It is important to invest your emergency fund wisely. This is a choice that you make. Even though I think this is a good idea, if you meet the criteria listed above, you may not find it to be the right choice for you.
Before exposing your savings to risk, you should consider a number of factors. You must create a financial buffer that stays in your account.
It is fine to use your emergency fund to reach financial goals.
Before you start, make sure you’ve met the criteria listed above. Don’t put yourself at risk and don’t rush to use your emergency fund.
