Is Investing Your Emergency Fund the Right Move Maximizing Your Financial Security

investing your emergency fund

Are you wondering if investing your emergency fund is the right move to maximize your financial security? In this engaging blog post, we explore the potential benefits and risks of this strategy. With interest rates on savings accounts at an all-time low, it’s crucial to understand how investing your emergency fund can potentially increase your financial security. Make an informed decision that aligns with your goals by diving deep into this concept. Read on to find out more.

In this engaging blog post, we delve deep into the concept of investing your emergency fund. With interest rates on savings accounts at an all-time low, it’s crucial to explore the potential benefits and risks of this financial strategy. Discover how investing your emergency fund can maximize your financial security and make an informed decision that aligns with your goals.

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

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

Low interest rates have been dragging on for almost seven years. Thats long enough to have some people, including me, rethinking the long-held advice that emergency funds shouldnt 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 — Betterments biggest competitor — disagrees. Communications Director Kate Wauck told me that the company “does not believe an emergency fund belongs in the stock market.”)

“You dont get a bill for inflation, it doesnt call you up at the end of the year, you cant 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 youll 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.”

Im listening, though with a side of terror. My husband is a freelance writer; he has a steady income but it isnt 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 Id 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 theres risk to low interest rates, but that doesnt change his view that emergency money shouldnt be invested.

“With interest rates at zero-point-who-cares, it is more costly for people to leave money in safe places. Youre 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.

Its 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 doesnt account for how easily youd 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, “youre just compounding your issues.”

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

But its also a financial one

Im fortunate to have a few credit cards but no actual credit card debt. I cant think of many scenarios in which Id 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 wont have dried up due to a market crash.

Egans 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 Id 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 Id 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 cant 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 Im 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. Im 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. Ill leave the bulk of that money in my savings account, where I know its safe and warm, and invest the bit Id consider excess.

But if you cant 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, theres 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:

More from NerdWallet:

  • The Future is Uncertain. Save Anyway.

  • How to Prioritize Your Savings and Investing Goals

  • The Best Robo-Advisors

Arielle OShea is an editor at NerdWallet, a personal finance website. Email:

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investing your emergency fund

investing your emergency fund

investing your emergency fund