investing

The Safest Way To Invest Your Emergency Fund

Amy Blacklock

WealthFit Contributor

You sleep better at night knowing money is stashed away in an accessible and safe savings account for emergencies—but if you knew that inflation is eating away at it year after year, would you still rest easy?

The truth is that inflation destroys large sums of cash that sits in traditional bank accounts over time.

Though the idea of investing an emergency fund—which acts as a mighty protector against inflation—might seem too risky even to consider, don’t dismiss the idea. Learn more about it and you may find that it’s the ideal fit for your financial situation.

While it’s a highly personal decision, and one you shouldn’t take lightly, making a move to invest your emergency fund—or even a portion of it—could not only preserve the buying power of the money you worked so hard to save. It could even help it grow over time.

What is an Emergency Fund?

You’ve likely heard the saying hope for the best, but plan for the worst. Maybe you spend more time hoping than you do planning.

While there’s nothing wrong with being optimistic, you can’t ignore Murphy’s Law, which states that anything that can go wrong will go wrong. This often comes with significant financial costs.

Have you found yourself in one or many of the following situations—while low on cash?  

  • You lose your job
  • A routine trip to the dentist results in a root canal
  • You are involved in a car accident
  • A bigger than predicted tax bill shows up
  • Your baby arrives weeks early
  • Your pet becomes significantly sick
  • You have to fly your family across the country for the funeral of a loved one

If you fail to plan for events like these, you’ll realize why you’re planning to fail.

Setting up an emergency fund is proactive planning for sudden or serious situations showing up in life—these are expenses outside of your regular budget.

An emergency fund prevents you from taking on high-interest debt during a stressful time when you have bills you cannot pay or a significant expense you weren’t expecting. It’s also your first step on the path to financial independence.

Think about an emergency fund as a safety net—a non-negotiable one that adds stability to your life.

Why Would You Invest an Emergency Fund?

Whether you finally saved $1,000 to cover small emergencies or you’ve amassed the recommended three to six months (or more) of living expenses in the bank—congratulations!

You’re already ahead of most Americans who can’t produce a few hundred dollars in an emergency.

But should it be in your bank of choice, or some other place?

Many people believe the safety and liquidity provided by banks addresses the goals of your emergency fund—security over returns, period.

But while it’s certainly easier to access money from a traditional brick-and-mortar bank, the interest paid on a savings account is almost non-existent.

That’s why people invest their emergency funds. Here’s the kicker, though: investing limits immediate access to your money.

You may even incur penalties to withdraw invested funds. You’ll also face the risk that you will need money for an emergency at a time when your investments have decreased in value.

And should you sell investments for an emergency when their value is down, you’ll miss the gains when investments recover.

There’s a chance you may even lose money, which negates the reason for investing in the first place.

When your money isn’t making more money for your future, inflation takes over. This “silent killer of wealth” negates cash sitting in bank accounts year after year.

Just like you want to protect your retirement funds from inflation, your emergency fund might need protecting too.

But it needs repeating: investing emergency funds is risky, and it’s definitely not for everyone.

Reasons to Keep an Emergency Fund in the Bank

There are plenty of good reasons to keep your emergency fund in a savings account even though inflation may be slowly eating away at your purchasing power down the road.

While your goal is to leave your emergency fund alone until an unexpected or sudden expense strikes, if your budget is squeaky tight, you might need access to savings at times.

You can battle some inflation in your emergency fund by using high-yield online savings accounts over those at traditional banks.

With many online banks paying 2% interest (or more) on savings accounts, it will help your money keep pace with inflation.

Even though you can’t walk into a branch to make a withdrawal when trouble strikes, you can typically access money via an ATM or transfer money easily on an app from savings to write a check from your online account.

When to Consider Investing an Emergency Fund   

While there is plenty of disagreement about investing money you’ve saved for an emergency, when you factor in the effect of inflation on savings, it’s easy to see why people go that route.

Even though a lack of liquidity and risk presents issues with investments, there are good reasons to consider investing to save your emergency fund from inflation.

Investing can be a good decision if you’re capable and confident in your ability to choose investments meeting your financial goals while still having access to money if you need it.

But investing all your emergency funds is very risky.

Instead, consider splitting it up. Put one month (or some part) of your expenses in a high-yield online savings account.

This covers short-term needs allowing you to invest what’s left. You can then use the cash savings before accessing investments if something happens.

While mitigating risk is important, for some it can make sense to fight inflation on emergency funds by investing at least some portion of them.

If it’s a possibility, you can also reduce risk by increasing the amount of your emergency fund to help offset any market corrections.

What are Emergency Fund Investment Options?

If you decide to move your emergency funds into accounts outside a traditional savings account, you have several options to consider.

The first two products are more saving than investment vehicles but are worth noting here due to their generally higher interest offerings with little downside.

Carefully weigh the risk versus potential returns and align your saving and investment decisions to your financial goals.

It’s important to mention you must also pay attention to fees when comparing savings and investment options.

While earning a higher return on your money is great, having to do so by incurring high or unnecessary fees can actually harm you in your battle against inflation if you’re not careful.

Here are your emergency fund investment options:

Certificates of Deposit (CD)

These might be the safest investment you can make, but likely offer a return just slightly higher than an online savings account. Look for No-Penalty CDs to avoid a loss of money for withdrawing funds before certificate maturity. Here’s a tip: CD laddering can help spread out the risk of tying up funds for lengthy periods.

Money Market Accounts

Like CDs, these are a safe product, offering slightly higher returns than online savings accounts but include FDIC protection, debit cards, and check-writing privileges. Fees, minimum balance requirements, and limited monthly withdrawals are potential drawbacks on these accounts.

Money Market Mutual Funds

With some similarities, but key differences from bank money market accounts, these are investment vehicles obtained through brokerage companies and mutual fund companies. Essentially, cash reserves within an investment portfolio can earn interest by buying shares in a money market fund while it awaits being withdrawn or invested in another investment product. Money market mutual funds invest in relatively safe vehicles like CDs, and short-term debt of governments and major corporations. Money in these funds can be accessed anytime, and some may come with check-writing privileges. But these accounts are not FDIC insured and may have expense fees.

Roth IRA

If you are eligible to contribute to a Roth IRA in 2019, you can invest up to $6,000 ($7,000 if you’re over 50) of after-tax money. Your contributions can be withdrawn at any time without a penalty.

Brokerage (Taxable Investment) Accounts

You have the potential for higher returns investing in stocks, but you accept more volatility as well. Bonds offer more stability, but you may also sacrifice returns. Consider index or exchange traded funds over individual stocks or bonds. You can sell assets and withdraw funds from brokerage accounts without penalty, but you may face transaction fees and taxes on earnings.

Health Savings Account (HSA)

If you’re enrolled in a High Deductible Health Insurance Plan (HDHP), you might choose to invest some of your emergency funds in an HSA. Many HSA’s are like a 401k in that you can decide how money is invested. The options to invest depend on which HSA company your employer (or financial institution) uses.

A 401k, 403b, or 457

You normally don’t want to touch funds in a retirement account before age 59 ½ because you risk both growth and penalties. But you may be able to take a loan or make a hardship withdrawal in some situations.

Investing an Emergency Fund

An emergency fund is a staple of financial stability—establishing one should be considered an absolute necessity. Without one, you risk going into severe debt when the unforeseen happens.

Deciding to keep funds in a savings account or invest emergency funds instead is both a personal and a financial decision. It doesn’t matter where you get the money from when it comes to paying for an emergency—it matters that you have money.

Don’t blindly follow the advice of a relative, friend, or something you read online. While inflation is a significant concern, investing an emergency fund may not be the right decision for you, no matter what anyone else says.

If you decide to invest, strike a balance. Benefit from higher returns and compounding over the long-term, while maintaining the ability to address immediate needs with money in a high-yield savings account.

Then you will not only be prepared for the unexpected; your emergency fund will also grow over time.

Share

Written By

Amy Blacklock

Amy Blacklock is the co-founder of the websites Women Who Money and Women's Money Talk, and the founder and blogger behind Life Zemplified.

Read more about Amy

RELATED TRAINING

 in 

INVESTING

live talk
Making Smarter Decisions With Your Money

JP says that if he can educate a teen and help that person avoid making a financial mistake or encourage them to take advantage of a financial opportunity, then his work is worth it. 

Making Smarter Decisions With Your Money

Listen Now
live talk
Investing in Defaults, Foreclosures, and Distressed Properties Due to COVID-19

There are many questions swirling about the lasting economic impact of the Covid-19 pandemic. For real estate investors, one of those questions is how to invest in defaults, foreclosures, and properties with distressed sellers. More importantly, how can you do so the right and ethical way?

Investing in Defaults, Foreclosures, and Distressed Properties Due to COVID-19

live talk
Learn How To Cashflow Gold with Scrap Metal

Because scrap gold has to undergo a refining process, many people don’t know the process, how to sell scrap gold, or even its real value. With the right training, you can buy scrap gold and sell it for a HUGE profit.

Learn How To Cashflow Gold with Scrap Metal

live talk
Generating Passive Income in Real Estate

Learn why Paul Shively thinks residential real estate is a hedge against market turbulence.

Generating Passive Income in Real Estate

live talk
Investing In Real Estate With Little To No Money

Has a lack of money kept you from investing in real estate? If so, you’re not alone. Angela Gregg had the same thought. But then she decided to educate herself on creative ways to invest. After finding a form of financing called a “Subject To”, she utilized her education and made a whopping $205,000 on her first deal — while investing none of her own money.

Investing In Real Estate With Little To No Money

live talk
Why You Need Education — Not "Advice" — to Invest in a Pandemic

In the midst of the economic outfall from the COVID-19 pandemic, many investors are wondering whether to buy, sell, or hold their current stock position, along with many other burning investing questions. Andy Tanner, the founder of the Cash Flow Academy and Rich Dad's Advisor on Paper Assets, explains that what sets apart those who will come out ahead versus those who lose money at a time like this boils down to one question: “do you want advice or do you want to get smarter?”

Why You Need Education — Not "Advice" — to Invest in a Pandemic

article
6 Options Trading Strategies for 2020

Utilize these 6 options trading strategies whether the markets are bullish, bearish, stagnant or volatile.

6 Options Trading Strategies for 2020

Chris Beer

Read Now
article
How to Buy a House Without a Realtor

Follow this 8-step process to buy your dream home while avoiding paying hefty fees to a realtor. Also, learn how to find the right real estate attorney and the best inspectors.

How to Buy a House Without a Realtor

Abhi Golhar

Read Now
article
Options Trading Made Simple

Learn what it means to trade options — and the strategies and tools you need to get started.

Options Trading Made Simple

Chris Beer

Read Now
live talk
Almost Going Public, Investing In Horses & Culture

From restaurant investor to horse investor, Eric Berman is the "Millionaire Matchmaker" who pairs investments, brands and influencers with their ideal audience! Listen in as he and Dustin discuss the best ways to brand a business and teach you exactly how to stay on top of digital marketing trends.

Almost Going Public, Investing In Horses & Culture

article
A Beginner’s Guide to Investing in Oil & Gas

Learn the top 6 ways to invest in oil or gas from anywhere — PLUS discover the specific tax advantages to petroleum investing.

A Beginner’s Guide to Investing in Oil & Gas

Cash Lambert

Read Now
Investing 101 for Teens

Investing 101 for Teens

The Beginner’s Guide to Smart, Successful Investing

JP Servideo

Watch Now
article
The Simple Guide To REITs: How To Invest In Real Estate With Less Risk & Regular Returns

Thinking about investing in a Real Estate Investment Trust (REIT)? Learn what they are, how they work, and how to pick the best one for you.

The Simple Guide To REITs: How To Invest In Real Estate With Less Risk & Regular Returns

Abhi Golhar

Read Now
article
How To Take Investing Seriously & Stop Playing With Your Money

Don McDonald dispels the most common myths about investing and lays out a strategy for a balanced portfolio and consistent returns.

How To Take Investing Seriously & Stop Playing With Your Money

Don McDonald

Read Now
live talk
How To Invest In Apartment Buildings

Michael Becker of SPI Advisory, on apartment building investing: how to find properties, make deals, and create passive income from rent.

How To Invest In Apartment Buildings

Building a Strong Financial Foundation

Building a Strong Financial Foundation

How to Protect Your Ass(ets), Save Smarter, And Start Putting Your Money to Work

Stuart Arakelian

Watch Now
Cash Flow The Stock Market

Cash Flow The Stock Market

How to Leverage the Stock Market to Create Multiple Streams of Income

Andy Tanner

Watch Now
Stock Investing 101

Stock Investing 101

How To Invest In Stocks (Even If You Have No Money To Invest)

Andy Tanner

Watch Now
Before You Invest

Before You Invest

The 4 Secrets to Making Smarter, Safer Investment Decisions

Andy Tanner

Watch Now
Invest Like Warren

Invest Like Warren

How To Make Money With Assets You Don't Even Own

Andy Tanner

Watch Now
Facebook Live Marketing

Facebook Live Marketing

How to Exponentially Increase Your Number of Leads Using Facebook Live

Bob McIntosh

Watch Now
Facebook Messenger Marketing

Facebook Messenger Marketing

How To Find Your Next Great Investment Property on Big Blue

Bob McIntosh

Watch Now
article
From Zero to Hero: Get a Financial Education & Start Investing Right

You don’t have money—yet. Learn how to begin businesses, invest in real estate, and make your start in the stock market from scratch.

From Zero to Hero: Get a Financial Education & Start Investing Right

Andy Tanner

Read Now
article
7 Ways to Invest in Real Estate With Little Money

Any cash you put in a real estate investment is cash you can’t use elsewhere. Here are 7 ideas to get that upfront cash as low as possible.

7 Ways to Invest in Real Estate With Little Money

Justin McCormick

Read Now