Investing emergency fund is a bad idea. Even if you invest the fund in the most liquid of investments that you can turn into cash quickly. Emergency funds don’t run on your schedule and you may even need to access the cash even faster than the 1 – 2 business days it takes to access your cash.
Emergencies are not planned. You never know when you need access to the cash. Companies are under no legal obligation to give you notice before laying you off. Or you never know what someone else’s wrongdoing causes you grief and force you to spend money.
Car accidents don’t happen when you plan it to and they are more common than you think. I had a neighbor back when I was in Houston who lived there for about six years. Every single year, they had a single accident that required insurance to make them whole again.
Some years, Houston flooded and other years, the other driver was reckless and careless. Emergencies are never planned and they will happen when you least want them to happen in your life. You don’t want to find out you don’t have an emergency fund when you most need it.
Investing emergency fund is one of the worst action you can take in personal finance. Even if you know what you’re doing. You never know just how much money you’ll need in your life. Divorce doesn’t just happen because you plan it. You never know.
Why Investing Emergency Fund is a Bad Idea
One reason why investing emergency fund is a bad idea is because you don’t have leeway to SMASH that social share button and post to your favorite social media! Your friends just might need a push and a kick to get their finances in order.
So with that said, let’s go over the reasons why investing the emergency fund isn’t a good idea!
1) It Defeats the Purpose of an Emergency Fund
Emergency funds are for capital preservation, it is NOT to grow your money. It’s to provide safety for when you need it. Financial security. Even if you are financially comfortable, you may still be in financial trouble if your money is tied up in illiquid investments.
The bear market of 2022 showed just how quickly financial emergencies and deterioration happens. I was expecting maybe something close to a 10% decline per year, if that. I did not expect a 23% decline in S&P 500 in just 6 months. That was unexpected.
A 23% decline in 6 months in an individual stock is expected. But in an index fund? I thought there was a good chance it’ll go lower, as well. And even quicker, at that. Emergencies do not give you a warning and it will happen to you quicker than you would like.
No one became bankrupt because they had too much of an emergency fund. Imagine investing the emergency fund in a bear market. Not advised.
2) Emergency Aren’t Planned
One day, someone left a wooden pallet out on the highway. I was on the road at 10:30PM and that pallet blew out my tire. I wasn’t planning on replacing any part of my tires but now I had to. Tires are expensive. That threw $300 down the drain.
Investing emergency fund is unwise because what if a tire place doesn’t accept credit cards and doesn’t want to sell you tires? Then you are at the complete mercy of someone else. Security and peace of mind are valuable things to have in your life.
My accident happened in the midst of rising inflation and I just felt horrible.
Since then, I changed my mentality from having 3 months of an emergency fund into a year’s worth of emergency funds. I want to make it into a year and 3 months, just in case. These days, financial security matters much more than anything else.
Plus, the increase in interest rates pay me money than the negative returns we’ve been experiencing in the stock market.
3) Liquidity
Investing your emergency fund even in safe investments such as a CD locks up your money for a predetermined period of time. What if you need that cash today? Credit cards are not a valid substitute for emergency funds. If you have a credit card for emergencies, you don’t have an emergency fund.
The liquidity that comes with emergency funds are valuable. I keep mine in a good savings account that pays 1.75% interest. it’s a pretty significant amount of money that goes into my bank account every month. It pays for tiny little things like a meal here and there.
Best of all? If I need money, I can access cash in a single day or so. It provides value to me than if I invested that money. Peaceful sleep is more valuable than any amount of money. YOLOing your life savings into one big gamble that may or may not work out is not the way to build wealth.
Instead of Investing Emergency Fund, What to do Instead
So then, there are still smart things to do with your money to grow it. All is not lost.
1) Keep it in High Yield Savings Accounts
With the Fed raising interest rates, savings accounts have been paying a decent amount as well. Not only that, it’s risk free money. These days, I’ve been getting paid close to $50/month on the money that I have in my high yield savings account. That pays for my electricity bill.
On top of that, savings accounts are FDIC insured for up to $250,000. At no extra cost to you. Great free added protection.
Investing emergency fund isn’t the only way to still grow your money. With savings accounts, you not only get returns on your money, but you get the added bonus of liquidity. Banks are offering many promotions these days and will literally pay customers money to join them.
It’s not going to be a huge revenue source and your money will most likely lose value to inflation. Savings accounts do not pay enough interest rates to beat inflation. However, emergency funds don’t exist to beat inflation or to provide returns. That’s not their purpose.
2) Keep it In a Checking Account
This one is less recommended than putting it in a high yield savings account. However, it’s still better than investing the emergency fund. Even then, you shouldn’t keep your checking account to be zero. I have a balance on my checking account for the ultimate liquidity.
Savings accounts have a 6 times per month transfer limit. Checking accounts do not. Plus, some utility companies do not let you pay with a credit card, you have to have a checking account in order to pay your bills. It’s important to have both a savings and a checking account.
Banks also offer incentives and bonuses to customers for opening up checking accounts as well. People can easily make upwards of $1,000 per year just by signing up for bank accounts and closing them after getting the incentive. It’s free money.
Checking accounts are getting better for the consumer, year by year.
3) Keep it in Cash
This one is even less recommended than keeping it in a checking account. Why? While holding physical cash is great, there’s a greater chance of losing that physical cash. You never think something like wildfires or house fires happen. Until they do. Through no fault of your own.
Yes, you may have insurance but insurance is not going to be happy doling out money to you. They will do everything in their power to pay you the least amount of money they can. Even if they can get sued for the remainder. That’s their entire business model.
So keeping your money in cash is even less recommended than putting your emergency savings in a checking account. However, that still doesn’t mean that it isn’t a viable option. I definitely keep thousands of dollars in physical cash just in case cash is necessary.
When I tried to buy a car in 2022, a dealership would NOT accept any checks, they just wanted cash. No exceptions. While I thought that was ridiculous, I still had the cash to pay the vehicle.
4) Pay Off Your Debt
If you have high interest debt or any interest debt that isn’t making you money, that’s not good debt. It’s bad debt. You may not even be in a net cash position and are thinking of investing the emergency fund. When you are in the paying down the bad debt phase, you don’t have an emergency fund.
The first step is to pay off your debt. You can’t think about having an emergency fund if you don’t pay off your debt first. You need the net debt amount to be negative. Paying down your debt comes above any other step in the building wealth journey.
There’s no greater feeling than not owing any money to any other person in the world.
That’s when you are free from the shackles. People cheer on if you take on debt to buy a $50,000 car on credit. While they should be weeping that you had to take on debt to have that vehicle in the first place. As someone who is debt free, let me tell you. It feels amazing.
What I Personally do With my Emergency Fund
Instead of investing my emergency fund, I personally keep my funds in a high yield savings account and keep a couple of thousand dollars in physical cash. This year, I’m actually even looking into increasing my emergency fund to one year and 3 months, maybe even 6 months.
The bear market of 2022 shocked and rocked my financial stability to no end. I didn’t think I could ever feel something like. It will take me a couple of months before I feel OK with my finances, and I’m willing to take a break and pad up my emergency fund in the meantime to prepare for the worst.
If we never hit a recession and if we come out with the economy stronger than ever, I am completely OK with that. I’m preparing for the worst and if the best happens, then all the better for me. Too many people haven’t experienced a big enough bear market drop to fully feel the effects of it.
I’m saving up and padding up my savings accounts from every bonus, extra paycheck, and the like. The government likes to tout how strong the labor market is. However, they don’t understand that labor markets are under what’s called “at-will” employment. Either side can walk away at any point.
That low unemployment of 3.5% for July may be something to cheer about. However, when the economy takes a turn for the worse, that metric can easily change for the worse. Dramatically. You may be the best employee in the world but if companies can’t afford you, they’ll have to lay you off.
Investing the emergency fund is a bad idea.
Investing the Emergency Fund is a Bad Idea
Many people think investing the emergency fund is a great idea. Especially during 2020 – 2021 where cheap money made it virtually impossible to lose money. Many people believed they were invincible as a result of those two years. Therefore, many people even invested their emergency funds.
2022 is when they faced the music. There are cycles. Booms always come with busts and vice versa. We have never escaped the cycle once or ever. The stock market may generally trend upwards in the long term. But along the way, there are many busts that come along the path and journey.
People think the bull market lasts forever until it doesn’t. We enjoyed one of the longest bull market the world has ever seen in the United States. However, there’s always going to be a time when we have to buckle down and tighten our finances even further.
Imagine not having security and peace of mind during one of the most turbulent times ever. i’ve hit rock bottom in the bottom of the 2022 bear market. It felt everything was hopeless, everything was my fault, and there was no way that I was going to dig myself out of this hole.
The more time passed, the better I felt. Because the more time passed, the more I padded up my savings accounts to keep me afloat over the coming years. There is no way that I’m going to depend on the government to take care of my financial needs. That money will always come with strings.
Investing your emergency fund will make you dependent on others.
