Emergencies happen, and that's why every adult needs an emergency fund. Once you have yours fully funded, it's going to be a sizable amount. The most common recommendation on emergency funds is to save enough to cover three to six months of living expenses. If your essential bills cost $4,000 per month, the recommendation would be saving $12,000 to $24,000.
Considering the amount of money involved, you might wonder if an investment account is a good place for your emergency fund. Instead of having that money sitting around in a bank account, you could invest and grow it.
It sounds reasonable, but it's not a good idea. Your emergency fund should never go in an investment account. While it could work out, there's a serious risk involved.
Why you shouldn't invest your emergency fund
Over long periods of time, investing is the best way to grow your money. The stock market, as measured by the S&P 500 index, averages an annual return of about 10% per year.
But that's not a consistent, stable return. You can't count on getting 10% per year like clockwork. Over short periods of time, the stock market can go up and down quite a bit. Your investments will do great some years and poorly in others. If you invest your emergency fund, the risk is that it could decrease in value before you need to use it.
Imagine that you had invested a $10,000 emergency fund at the start of 2022. You put it in an S&P 500 mutual fund. Unfortunately, the S&P 500 declined by 19.4% that year. Your emergency fund would have been worth a little over $8,000 at the start of 2023 -- bad news if you had a costly emergency and needed to start withdrawing from it.
The purpose of an emergency fund is to protect yourself from financial emergencies. By having one, you reduce your risk of being in a tough position and possibly needing to go into debt. If you invest that money, you're putting it at risk, which defeats the purpose of having an emergency fund.
Where should you put your emergency fund?
The best place for an emergency fund is a high-yield savings account. Here's why:
- Your money will be safe and insured. There's no risk of your money losing value, like there is when you invest it. As long as you pick a bank with FDIC insurance, your deposits will also be insured for up to $250,000 per eligible account in the event of a bank failure.
- You'll earn a reasonable interest rate. Rates fluctuate, but they're high right now, especially with high-yield savings accounts. There are plenty of accounts with APYs of 4%, 5%, or more.
- You'll have easy access to your money. If you have an emergency, you can just withdraw money from your savings account. Some savings accounts have withdrawal limits, normally of six withdrawals per month. That's normally more than enough, but if you want to avoid this entirely, there are also savings accounts with no withdrawal limits.
You don't need to worry about fees, either. There are plenty of savings accounts with no fees or even minimum balance requirements. If you're looking for a good option, check out The Ascent's list of the best high-yield savings accounts.
It's great to think about ways to make the most of your money. But keep your emergency savings and your investments separate. Your emergency fund should be in an account where there's no risk it will decrease in value, and where you can access it at any time. Your investment account is for money you know you won't need for at least five to 10 years.
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FAQs
Ideally, you'd put your emergency fund into a savings account with a high interest rate and easy access. Because an emergency can strike at any time, having quick access is crucial. So it shouldn't be tied up in a long-term investment fund.
Should I put my emergency fund into investment? ›
You shouldn't invest the money in your emergency fund, because it could decrease in value before you need to use it. A high-yield savings account is the best place for your emergency fund. This type of savings account keeps your money safe, and you can also earn a competitive interest rate on it.
What account should I keep my emergency fund in? ›
Online savings account or money market deposit account
Online savings and money market accounts are both well-suited for your emergency fund. In addition to insurance coverage from the FDIC or National Credit Union Association (NCUA), these accounts offer the most competitive interest rates on savings products.
Can I use a brokerage account as an emergency fund? ›
A brokerage account offers total flexibility, but no special tax advantages. It is reasonable to consider a brokerage account as part of your total emergency resources, but be sure to haircut it as we did above.
Is $20,000 a good emergency fund? ›
A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.
What is the biggest downside of putting emergency savings in a fixed investment? ›
Unexpected expenses, of course, are totally unpredictable and when you invest your emergency fund, you run the risk of possibly losing your initial investment if the value of your assets falls below what you purchased them for.
What is the 50 30 20 rule? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Should I put my emergency fund in treasury bills? ›
And if you have to spend any of the money, you should plan to replace it. You might also consider buying U.S. Treasury bills with some of your emergency fund money. They, too, can be timed to mature on a regular schedule and, like CDs, they tend to pay more interest than a simple savings account.
Is $1000 enough for emergency fund? ›
How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.
Should I put all my money into a brokerage account? ›
The reality is, unlike other kinds of financial accounts, you can't really go wrong with a bigger brokerage account balance. However, while you want to put as much money into a brokerage account so you can invest in the market, you don't want to end up with more risk than you should take on.
Holding cash here is appropriate if you plan to spend the money within a few days or would like to quickly place a trade. Assets in your brokerage account are protected up to $500,000 per investor, including a maximum of $250,000 in cash by SIPC in the event a SIPC-member brokerage fails.
What does Suze Orman say about emergency funds? ›
Emergency saving accounts
“This is the starter block,” she says. “Obviously, we don't expect that you have eight to 12 months of an emergency fund. This is where you start to learn how to save.” Orman's hope is to “change the saving habits of everybody in this world.”
How much savings should I have at 35? ›
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary.
What does Dave Ramsey say about CDs? ›
Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.
What is the 50 20 30 rule? ›
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
Is 100k emergency fund too much? ›
But some people may be taking the idea of an emergency fund to an extreme. In fact, a good 51% of Americans say $100,000 is the savings amount needed to be financially healthy, according to the 2022 Personal Capital Wealth and Wellness Index. But that's a lot of money to keep locked away in savings.
Is a 12 month emergency fund too much? ›
As a general rule, most workers can get away with a three- to six-month emergency fund. If you're retired, a 12-month emergency fund is more appropriate. Consider a 12-month emergency fund if you have a very unique job or are self-employed.
What is the 50 30 20 budget rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
