Investing Your Emergency Fund

There’s a ton of information out there on emergency funds and why it’s important to have one. You probably already know this, but typically it is recommended that you save between 3-6 months of your expenses in a cash emergency fund in case you need the money.

Some people like Suze Orman even recommend that you save as much as 8 months in an emergency fund. I think a lot of this is generally bad advice for most Millennials since you could be using the money to build wealth instead of keeping your money on the sidelines.

Sure something in life is always bound to happen, but there are better ways to insure yourself against emergencies than stashing a bunch of money away and missing out on the opportunity to grow that money over time.

For a different perspective check out the Millennial Money Minutes podcast we did on rethinking emergency funds:

No having your money in a savings account is not growing your money – even if you are using a high-interest Ally Bank account you are still only getting about 1% return on your money. This isn’t even enough to keep up with inflation so over time you are actually losing money. For most Millennial investors it actually makes a lot more sense to start investing the money in your emergency fund. Here’s why – because the more money you invest now the more it can grow over time due to the effects of compounding interest (your interest growing interest).

Should You Invest Your Emergency Fund?

When doing my own research on “should I invest my emergency fund” I probably read through at least the first two pages of Google and really couldn’t find a real answer to my question. In reality this is because determining whether it makes sense to invest your emergency fund really depends on your unique life circumstances. But to help you decide let me share my own experience and also highlight some of the scenarios where investing your emergency fund makes sense.

Over the past 5 years, I have been a diligent saver and my first goal (like most personal finance experts recommend) was to build an emergency fund to cover 6 months of my expenses. So that is what I did – I saved up $30,000 and put the money into a high-interest rate Ally bank account earning 1%. After 3 years my $30,000 had turned into approximately $31,000 – which is a terrible return when compared to the returns generated by the stock market during that same 3 year period. I essentially missed out.

In hindsight, if I would have put that $30,000 into anything else I likely would have made a lot more money on my money. If I had purchased Facebook stock for example my $30,000 would now be worth about $90,000. Now I am not recommending you use your emergency fund money to buy Facebook stock, or any stock for that matter – I am simply highlighting that I could have achieved much greater returns over the same time period with my emergency fund.

Even if I had put my $30,000 in a low-cost index fund like Vanguard Total Stock Market ETF and taken advantage of the growth of most of the US equities market then my money still would have grown into approximately $46,000. That is substantial growth compared to the $1,000 my emergency fund earned over that same time period. But critics would argue what if you needed that money during the past 3 years? What would you have done in an emergency if you had your money invested? Well, that’s the key question.

See this is where I made a mistake with my emergency fund that you don’t have to make. I had plenty of other ways to cover an emergency if one happened and didn’t need to have my money just sitting earning super-low returns.

How do you know if you are ready to invest your emergency fund?

Use the checklist below to help you decide and ask yourself honestly if you have most of the following (the more you have the more likely you should be investing your emergency fund):

  • Stable job: One of the biggest reasons most people keep an emergency fund is because there’s the possibility they might lose their job. While anything can happen – if you feel you have a stable job or that you work in an in-demand job then you can probably invest all or at least part of your emergency fund. For example, if you work in digital marketing if you lost your job you could probably walk across the street and get a new one pretty easily. Evaluate the security of your own job and career track: How important are you to your company? How in-demand is what you do?
  • Additional income opportunities: This is a big one – a lot of Millennials are hustlers and everyone can find additional income opportunities if they look hard enough. You can tap into these opportunities if you needed money for an emergency. If you get creative you can always find new ways to make money – work as an Uber driver, start a dog walking business, sell your old stuff on eBay, or becoming a freelance writer. Check out some of the popular freelance websites like Upwork or Taskrabbit to find additional income opportunities to cover your emergencies. What can you do for extra money if you need it for an emergency?
  • Investments you could sell if you needed: While it is rarely a good idea to take money out of your investments, that money is still yours if you need it. One piece of advice – take money out of your non-retirement investment accounts first if you have them. For example, if you run into an emergency and own some stocks, sell any of them that have losses first before tapping into your retirement accounts. If you need money out of your retirement accounts and have money in a 401k and Roth IRA then take the money out of your Roth IRA first – because you can take out the money you have directly invested (not the gains) without a paying a penalty. To take money out of your 401k you will likely have to take a “loan” from your 401k if your employer allows. What investments could you sell if you ran into an emergency?
  • Quality insurance coverage: Some “emergencies” might be covered by your insurance or even your credit card benefits. For example, if you have great car insurance you will likely be covered if you get into an accident or a tree falls on your car. If you purchased something with a premium credit card it might be covered if it gets damaged or lost. Keep track of all of your insurance coverage in one place and see what coverage you would have in an emergency. What emergencies does your insurance cover?
  • High credit card limits: Yes, of course, it’s not ideal to put emergencies on a credit card, but if you have a stable job and meet the other criteria above then you will likely be able to pay off your balance each month or in the worst-case scenario you could carry a balance for a month or two if needed. Using your credit card for emergencies can actually be one of the best ways for using credit – it gives you a cushion if you need it, while your own money can stay invested earning interest and compounding over time. Of course, be careful not to get too far ahead of yourself and make sure you will have the ability to pay off your cards relatively easily in the next few months if you use them as your emergency fund.

I am sharing this so you don’t make the same mistake I did. Over the past few years, I have been investing the money that used to be my emergency fund and it has grown significantly. I actually keep very little cash on hand – usually only one or two paychecks – enough to cover a few months of my expenses in my checking account. Everything, literally everything else that I have is invested across a diverse range of investments including real estate, stocks, index funds, and even a small art collection. I want to make sure that my money has the best opportunities to make money – which is the essential key to building wealth.

What about you? How are you going to invest your emergency fund?

Leave a Reply

Your email address will not be published. Required fields are marked *

Read Comments

  • Comment Author image blank
    I've been leaning this way as well. I just joined M1 Finance and am planning to use that for at least part of my emergency fund. Right now I have 6 months worth of "must have" monthly expenses (from All Your Worth) in the savings account of my credit union, which is at way less than 1%. I figure putting it in a conservative fund of mostly bonds (like maybe 80% BND and 20% VT) will protect against too much loss all at once. And it'd only take a couple of days to get money out of it if I really needed to. If I instantly needed money, I could put that on my CC and pay it off before it is due.
  • Comment Author image blank
    On the fence about this right now myself. I'm definitely leaning towards investing in something relatively safer like a major index. Wow though, your six month expenses are 30,000!!? I was thinking of like 6-10K in my emergency savings only.
  • Comment Author image blank
    I've been thinking hard about this for the last few weeks and keep coming to the same conclusion. I cannot understand why it would make sense to keep funds in a savings account. If high-yield savings is at MOST 1% (I checked my Ally Savings today and it's only 0.5% but fluctuates month to month) it's a no-brainer to invest when low-ball estimates are 5%. Anyway, you noted all these things yourself, but I just wanted to say I agree with this thought process. Thanks for the article. P.S. If an emergency hit, you could probably take out loans (with credit cards, or home equity, etc etc.) and cover that emergency. Obviously, that's not a long-term solution but I would argue most emergencies aren't long-term problems.
  • Comment Author image blank
    […] high income earners don’t need a traditional emergency fund, at least right off the bat. And Millennial Money has a nice checklist to help you decide if you need a traditional emergency fund in cash, […]
  • Comment Author image blank
    I agree with Grant here. You and your target group of readers may think this is a wonderful idea, because you have only seen a rising stock market. While I agree that this is a great idea for you, I think that it is horrible advice for someone just starting out. You have built up a large enough taxable account that even with a crash, you would still have "emergency funds." However, many of your readers are just starting out and maybe don't realize how expendable their job is, haven't seen how quickly a market down turn can wipe out their funds, and haven't experienced how long it can take for the economy to turn around. Again, I think it's good advice for someone a little further along, but I think you should have a LOT more cautions in this article.
  • Comment Author image blank
    After a few more years you will realize that the added stress to you and your relationship is not worth the return. A rainy day will come like the one you missed in 06. Then you will become wise and have your emergency fund back. It may not make you a 20% return but it could make the difference one rainy day of losing it all. Consider it an insurance policy.
  • Comment Author image blank
    I am still on the fence about investing your emergency fund. In India, where I live, there are two good options for Emergency Funds. There is an extremely popular conventional product called Fixed Deposit where one can put in their money for a 6.9% rate of interest per annum (currently that is. Till some time back, the rate was hovering between 6.15% and 6.30%). However, any interest income for such a product is taxable. So, in one year, if you invested Rs. 10,000 in a Fixed Deposit, you would earn an interest of Rs. 690. If you are in the highest tax bracket, out of the Rs. 690, 30% (Rs. 207) would be what you pay to the tax man, reducing your final returns to Rs. 483 - a return of 4.83% per annum. This return is not subject to market risk or volatility and is a guaranteed return. One thing to note here though is that the rate of inflation in India has hovered between 5-6% for years now and any money in Fixed Deposit does not keep pace with it. Two other products which are generally seen as less volatile than equities are liquid funds (a category of debt fund) and ultra short bonds which have been seen to give a return of 8% per annum. Of course, brokerage and management fees would end up taking quite a chunk out of it.
  • Comment Author image blank
    Thank you for this article- I have been leaning towards this, but I'm a little concerned about this strategy. My issue with investing my 'Emergency Fund' is that if the economy did tank again, there's a much higher than normal chance I lose my job. If the economy does tank and I'm out my job, and the stock market has just crashed, my low cost index "emergency" fund has depreciated considerably. It's also probably much harder to find side work during another recession.
  • Comment Author image blank
    Thank you for this article, very well written. I did the Dave Ramsey thing last year and got all debt paid off and built up a 6 month emergency fund, which was great. But now, I see that large emergency fund sitting there doing nothing but losing purchasing power. I have a stable job, no kids, in great health, have good insurance, so I've been looking for some verification to invest part of my emergency fund. I think I'm going to still keep ~2 months emergency fund liquid, and invest the other '4 months' of emergency capital. I can't imagine a time where I would be in an emergency and would need to pay that same day of the emergency. I see it as - I can always sell investments, wait the 2-3 day settlement period, and then use that capital to pay for the emergency. I'm trying to think of a time where you would need to put down >$10,000 without at least 1 week notice to pay, but can't.
  • Comment Author image blank
    So I booked marked this post sometime back as a reminder I needed to read again. I have a lot of your posts booked marked for reference or guidance/advice. I wanted to ask how do you feel about Ally Bank? I hear it has great rates but customer service not so much. I was thinking about investing some of my emergency funds in their high yield savings account while I continue to build my investment account. I got concerned after I did some research and didn't find that many great reviews with their customer service. Any thoughts on using them? As always thanks for writing great these great posts. Keep them coming!
    • Grant Sabatier
      Hi Andrea, I like Ally bank. I previously used them for 5+ years. Their high yield savings accounts are some of the highest returns for a savings account that you can find. I always found their customer service helpful. Thanks for reading!
  • Comment Author image blank
    Great post! Working on a post on e funds and it really does depend on your check list above.
    • Comment Author image blank
      Thanks Miss Bonnie. Investing my emergency fund is one of the best investment decisions I've made.
  • Comment Author image blank
    Fantastic post! I love the concrete example you provide! We've recently set up a HELOC so we can invest some our emergency savings.
    • Comment Author image blank
  • Comment Author image blank
    Couldn't agree more! My take on the Emergency Fund is to simply have no designated EF. My entire portfolio is available in case of an emergency. Which is equivalent to "investing the EF". And for folks in the FIRE community who have 60%+ savings rates, chances are you don't even have to dig into savings, but simply pay it out of the HELOC (Home Equity Line of Credit) and then use a few months worth of savings to pay down the balance.
    • Comment Author image blank
      Oh yeah! I got a lot of flack for this post, but I agree with you. There are better uses of money than letting cash sit at less than 1% interest. I would rather make money on my money. I wish more people knew this. Every single piece of advice I read on mass media sites are all about building the emergency fund. Forget that..Build that investment fund!