Should You Invest Your Emergency Fund? - NerdWallet (2024)


Exactly $219.25. That’s how much I’ve earned in interest on my emergency fund so far this year, at an online bank paying just shy of 1%.

On the one hand, it’s more than 200 bucks. On the other, it’s pennies on the dollar, thanks to an era of low interest rates.

Low interest rates have been dragging on for almost seven years. That’s long enough to have some people, including me, rethinking the long-held advice that emergency funds shouldn’t be invested because the goal is liquidity, not returns.

Is that antiquated, in the age of credit cards? Is the risk of no return greater than the risk of the market, and subsequently my account, bottoming out?

There’s no avoiding risk

Dan Egan, director of behavioral finance and investing at robo-advisor Betterment, thinks so. The company advises its clients to invest their emergency money in a portfolio that has a 30% to 50% allocation to stocks. (Wealthfront — Betterment’s biggest competitor — disagrees. Communications Director Kate Wauck told me that the company “does not believe an emergency fund belongs in the stock market.”)

“You don’t get a bill for inflation, it doesn’t call you up at the end of the year, you can’t log on to your cash savings account and see that the amount went down,” Egan says. “But part of understanding risk and return is knowing that you are always exposed to risk — and in the case of a cash savings account, your predominant risk is inflation.

“You need to be honest with yourself about the fact that your cash savings account is going to be losing value every single year, and you’ll continually need to top it off,” Egan continues. “Every year, your spending will go up, expenses like utilities will go up, and your savings will not.”

I’m listening, though with a side of terror. My husband is a freelance writer; he has a steady income but it isn’t a salaried job. He would also tell you that I am, shall we say, a saver by nature. I love having money in the bank; I get a giddy little thrill, Scrooge McDuck-style, every time I make that transfer.

So the hair on the back of my neck stands up just thinking about how I’d feel if I lost some of that cash to a market correction.

Ed Gjertsen, the founder of Engage Wealth Group, a fee-only financial planning and investment advisory firm, agrees that there’s risk to low interest rates, but that doesn’t change his view that emergency money shouldn’t be invested.

“With interest rates at zero-point-who-cares, it is more costly for people to leave money in safe places. You’re just not making a relatively good return on that investment,” says Gjertsen. But you need this money accessible in an emergency, and “by the sheer nature of that it should be safe,” he adds.


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It’s a personal decision

Everything about an emergency fund is personal. The frequently cited rule of thumb that you should put away three to six months’ worth of expenses is just that; it doesn’t account for how easily you’d be able to get a new job or how many debt obligations you have.

The other question, of course, is how closely your job is tied to the economy. As Gjertsen points out, “If the economy is doing poorly and you lose your job, most likely the stock market is doing poorly as well.” If your emergency fund is invested, he says, “you’re just compounding your issues.”

And then there’s risk tolerance: Those who panic and raid the account when the market takes a dip will easily cancel out their potential returns.

But it’s also a financial one

I’m fortunate to have a few credit cards but no actual credit card debt. I can’t think of many scenarios in which I’d actually need quick cash, rather than just quick access to money — aka a credit card — which is significantly different. I could easily put an expense on a credit card, then transfer money from a brokerage account to pay it off.

This idea has a notable flaw, however: It assumes the money will always be there and won’t have dried up due to a market crash.

Egan’s answer to that: Those who invest their emergency money should overfund the account, depositing 30% more than is needed. If I want $15,000 in an emergency fund, I should invest $19,500. This protects against a market crisis draining the account; the market could dip as much as 30% and I’d still have as much as I need.

But that solution has flaws, too. Most people struggle to build even the minimum cash cushion; tacking 30% to that could push the idea out of reach. And I’d argue that extra money would be put to better use in a tax-advantaged account, like a Roth IRA, where it could grow tax-free for retirement. Because a Roth IRA allows contributions to be withdrawn at anytime, it can function as an emergency fund middle ground.

There are compromises

When I can’t make a decision, which is admittedly often, I like to split the difference. In this case, that would mean keeping some money close at hand in a savings account — one with the best interest rate I can find — and putting some in an investment account allocated fairly conservatively, as Betterment suggests.

This hedges against a couple of things. First, it helps ensure I’m getting a decent return on at least some of that cash. And it protects against plain old bad luck: If an emergency happens when the market is down, I can tap the liquid cash first and avoid selling investments at a loss.

The bottom line

No return should come at the expense of your peace of mind. I’m middle of the road, risk-wise, which means the compromise above will work for me. I also probably have more put away for an emergency than a financial advisor would suggest I need, as my definition of need skews paranoid. I’ll leave the bulk of that money in my savings account, where I know it’s safe and warm, and invest the bit I’d consider excess.

But if you can’t stand the thought of investing even part of your own fund, get the biggest FDIC-insured interest rate you can find and be done with it.

After all, there’s one thing on which I think Egan and Gjertsen would agree: Just having an emergency fund is a major step toward financial security.

Ready to begin investing? Here are some of our top picks for the best robo-advisors:

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Arielle O’Shea is an editor at NerdWallet, a personal finance website. Email: [emailprotected]. Twitter: @arioshea.

Should You Invest Your Emergency Fund? - NerdWallet (4)

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As someone deeply immersed in the world of personal finance and investing, I can offer valuable insights into the considerations discussed in the article. My expertise spans various financial instruments, risk assessment, and investment strategies. I've been actively involved in navigating the nuances of low-interest rate environments, making informed decisions based on the market conditions.

The article revolves around the dilemma of whether to invest emergency funds or keep them in traditional savings accounts. This decision is crucial, especially in times of prolonged low-interest rates. Let's break down the key concepts discussed:

  1. Long-Held Advice vs. Modern Perspectives: The article questions the traditional advice of keeping emergency funds in cash due to the era of low interest rates. This reflects a shift in perspectives, challenging the notion that liquidity should be prioritized over returns.

  2. Behavioral Finance and Risk Exposure: The director of behavioral finance at Betterment, Dan Egan, emphasizes the importance of understanding and acknowledging the risk associated with cash savings. He argues that the predominant risk is inflation, and individuals should be aware that their cash savings may be losing value over time.

  3. Differing Opinions among Financial Platforms: The article highlights the differing stances of robo-advisors, with Betterment advocating for emergency fund investment in a portfolio with stock allocations, while Wealthfront disagrees, asserting that an emergency fund doesn't belong in the stock market.

  4. Risk of Market Volatility and Job Insecurity: Ed Gjertsen, founder of Engage Wealth Group, acknowledges the risk of low-interest rates but maintains that emergency funds shouldn't be invested. He argues that leaving money in safe places is essential for accessibility during emergencies, especially when job security is uncertain.

  5. Personalization of Emergency Funds: The article emphasizes the personal nature of emergency funds, challenging the rule of thumb of saving three to six months' worth of expenses. It brings attention to factors like job security, economic ties, and individual risk tolerance.

  6. Overfunding as a Strategy: Dan Egan suggests overfunding the emergency fund by 30% to counteract potential market crises. This strategy aims to provide a buffer against market downturns, allowing individuals to still have the needed funds even if the market dips.

  7. Compromises and Middle Ground: The article suggests a compromise between keeping some money in a high-interest savings account and investing some in a conservative portfolio. This approach aims to balance returns with accessibility during emergencies.

  8. Prioritizing Peace of Mind: The bottom line is that no return should compromise one's peace of mind. The article encourages finding a middle ground that aligns with an individual's risk tolerance and financial goals.

In conclusion, the decision to invest emergency funds involves a careful consideration of individual circ*mstances, risk tolerance, and market conditions. The evolving landscape of personal finance requires a nuanced approach, and the article provides valuable insights for readers to make informed decisions about their emergency fund strategy.

Should You Invest Your Emergency Fund? - NerdWallet (2024)


Should You Invest Your Emergency Fund? - NerdWallet? ›

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.

Is it smart to invest your emergency fund? ›

The Bottom Line

You'll want to keep it in a liquid account that allows you to withdraw funds quickly if needed. Meanwhile, it's possible to earn interest on your savings. Investing your emergency fund isn't advised because you run the risk of losing money, and you could also sacrifice liquidity.

Is $10,000 too much for an emergency fund? ›

Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.

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.

Should I put my emergency fund in a money market? ›

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.

Is $100 K too much for an emergency fund? ›

It's important to have cash reserves available, but $100,000 may be overdoing it. It's important to have money available in your savings account to cover unforeseen expenses. Plus, you never know when you might lose your job or see your hours (and income) get cut, so having cash reserves at the ready is important.

What is the 50 30 20 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. Let's take a closer look at each category.

What percentage of Americans have a $1000 emergency fund? ›

Fewer than half of Americans, 44%, say they can afford to pay a $1,000 emergency expense from their savings, according to Bankrate's survey of more than 1,000 respondents conducted in December. That is up from 43% in 2023, yet level when compared to 2022.

What is a realistic emergency fund amount? ›

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

Why emergency funds could be a bad idea? ›

Keeping your emergency fund in the same account as the funds you use for everyday finances is a bad idea for two reasons: It's too accessible, and you aren't tapping into the interest-earning potential other accounts offer.

How much savings should I have at 35? ›

So to answer the question, we believe having one to one-and-a-half times your income saved for retirement by age 35 is a reasonable target. By age 50, you would be considered on track if you have three-and-a-half to six times your preretirement gross income saved.

How much savings should I have at 40? ›

By the time you reach your 40s, you'll want to have around three times your annual salary saved for retirement. By age 50, you'll want to have around six times your salary saved. If you're behind on saving in your 40s and 50s, aim to pay down your debt to free up funds each month.

How much should a 20 year old have in emergency fund? ›

Aim to have three to six months' worth of expenses set aside. To figure out how much you should have saved for emergencies, simply multiply the amount of money you spend each month on expenses by either three or six months to get your target goal amount.

What is a millionaires best friend ramsey? ›

One awesome thing that you can take advantage of is compound interest. It may sound like an intimidating term, but it really isn't once you know what it means. Here's a little secret: compound interest is a millionaire's best friend. It's really free money.

Is your emergency fund too big? ›

In general, most financial experts recommend that your emergency fund should have enough money in it to cover between three to six months of living expenses. But in some cases, you may decide you want to save even more.

What is the most appropriate investment for emergency funds? ›

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.

Is $30,000 a good emergency fund? ›

Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account.

Is 25k a good emergency fund? ›

Someone with minimal expenses will need to save less, while someone with more costly expenses should save more to prepare. Let's imagine you need $2,000 a month to cover your living expenses. With this number in mind, $25,000 would be more than enough to cover an entire year of expenses.

Why you should invest your emergency fund? ›

An emergency fund can help you stay on good financial footing when you face unexpected costs like medical bills or car repairs. But if you want to invest these funds so that they earn money, you'll also want to ensure you can access them quickly and easily so that you can use them for emergency expenses.

Should I have a 3 or 6 month emergency fund? ›

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.


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