Sure, you probably don’t expect to get laid off, or expect your roof to spring a leak. But life is full of surprises. Stuff happens when you least expect it. That’s why you need a safety net to cover yourself and your family for three to six months’ worth of unexpected expenses.
For people just getting their financial footing, determining if investing an
What is an
An emergency fund is an easily accessible account you can use if your financial situation takes a hit—the key point here is easily accessible. This money should be liquid enough so that you can simply go online and transfer it to your chequing account, or walk into a bank and withdraw it. Experts recommend saving enough to cover your basic expenses for three to six months.
However, recommendations are more like guidelines. It’s essential to consider your financial situation and risk tolerance to determine the appropriate amount to save. If you have several monthly expenses, dependents counting on you, or a mortgage to service, you’ll need a larger cushion to rest easy than if you carry fewer obligations.
Is it a Good Idea to Invest Your
With an emergency fund, you generally have two options: let the money you’ve saved sit in an account until you need it, or put it where it will grow over time. While the choice to invest an emergency fund is largely personal, we advise against investing money you may need in the short term.
First, regarding letting your money sit in a bank account, there’s the fear that your money will lose its value due to inflation. Alternatively, if you invest in the stock market, you’ll need to look out for the extreme volatility often experienced.
Liquidity is another aspect to consider when investing your emergency fund. How fast can you access your assets or funds when you need them? An emergency fund is intended to bail you out of a financial disaster, so it should be quick and easy to access.
The Pros of Investing Your
- Grow your money. The main advantage of putting your
emergency fundin an investment account is the ability to grow it through higher returns. This is unlike keeping your money in a savings account that generates little to no returns. Investing your emergency fundalso means you’ll likely have more money when you do withdraw it.
- It’s still accessible. Some investment vehicles, such as a brokerage account, still let you withdraw your money when you need it.
The Cons of Investing Your
- Market volatility. Sure, there’s the potential for higher returns when the market goes up, but you can quickly lose your investment when the market dips. Market movements are unpredictable, so investing your
emergency fundis more or less a gamble.
- Less accessibility. While you can temporarily offset an emergency expense with your credit card as you withdraw money from your brokerage account, it is still much less accessible than having your money in the bank. Plus, if you’ve invested in assets, there’s a chance you won’t be able to liquidate them soon enough.
When to Consider Investing an
Many people worry that market volatility will cause their
A common belief is that cash is the only true liquid option for an
- You have more than six months’ worth of expenses saved
- You have other options for financial emergencies, like a credit card with a high limit
- You have multiple income streams
- You paid off a significant portion, if not all, of your debt
- You have a stable job
- You have adequate insurance, whether it’s life, home, auto, or health insurance
Investing your entire
Understanding What is Safe and Liquid
With perhaps thousands of dollars in play, one priority should be to have your
High-yield Bank Accounts
A high-yield bank account is an excellent place to store your
When searching for high-yield bank accounts, consider options with competitive interest rates and no monthly fees or balance requirements. In addition, some banks offer welcome bonuses to new customers, so you can score a few upfront benefits if you meet the terms and requirements.
Money Market Accounts
Simplicity and accessibility of funds make money market accounts an excellent option for investing your
Watch out for the money market account fees that could eat into your returns. As with any account, comparison-shopping will help you weigh the different features and fees before deciding where to put your
Certificates of Deposit (CDs)
CDs often have higher interest rates than the account options mentioned above. This is because CDs offer a fixed rate of return for a specific period (such as 1.50% APY for 24 months). With your rate of return guaranteed, a CD will earn extra interest on your
The higher rate of return comes with a catch: your money is pretty much tied up in the account until it matures. In fact, there is a penalty if you access your funds before the account matures. To avoid such penalties, you can choose to ladder your CD accounts—opening multiple CDs with different maturity dates so that a certain amount of money is available at any time.
While many people use a Roth IRA to save for retirement, using it for an
While you can withdraw contributions tax-free, you must be careful when withdrawing your earnings—the returns on your contributions. An early earnings withdrawal comes with a penalty.
Conclusion and Recommendation
For most of us, building an
When investing your