Should You Invest Your Emergency Fund?

Should You Invest Your Emergency Fund?

Should You Invest Your Emergency Fund?
Reading Time: 5 mins

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 emergency fund is a good way to grow their cushion can be off-putting. For many, investing an emergency fund may seem too risky to even consider—but don’t dismiss the idea just yet. Read on and learn more about investing your emergency fund to see if it’s the right choice for you.

How To Set Up An Emergency Fund Quickly & Easily

We've got everything you need to know to get your emergency fund started. Just how much will you need? Where should you keep it? Read on to find out!


What is an Emergency Fund?

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 Emergency Fund?

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 Emergency Fund

  • Grow your money. The main advantage of putting your emergency fund in 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 fund also 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 Emergency Fund

  • 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 fund is 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 Emergency Fund

Many people worry that market volatility will cause their emergency fund to drop in value when it’s needed most—despite the cost of having an emergency fund whose rate of return is less than the rate of inflation.

A common belief is that cash is the only true liquid option for an emergency fund to ensure you can cover sudden, unexpected expenses. The purpose of an emergency fund isn’t to earn a high return or even a nominal one—it’s solely for an emergency. Still, there are times when investing an emergency fund makes sense. Consider investing part of it if:

  • 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 emergency fund is as lucrative as it is risky. We recommend splitting your investments into different vehicles. For example, you can put one month’s worth of expenses in a high-yield savings account and direct the rest to a mutual fund. An emergency fund that sits dormant may lose value due to inflation, so consider investing at least some of it.

Understanding What is Safe and Liquid

With perhaps thousands of dollars in play, one priority should be to have your emergency fund parked in a safe haven and earning a decent return. Yet, with the need for instant accessibility, safety and liquidity are the top concerns when putting away your emergency kitty. In choosing where to keep your emergency fund, consider these four options that offer easy access, safety, and other benefits.

High-yield Bank Accounts

A high-yield bank account is an excellent place to store your emergency fund for two reasons: it offers the accessibility of a traditional savings account, while earning higher interest on your deposits. The interest rate might not be high enough to beat inflation, but the safety and liquidity of these accounts are unbeatable.

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 emergency fund. Considered a chequing and savings account hybrid, a money market account offers higher interest rates, often better than its high-yield counterparts. In addition, you can conveniently open a money market account online or at your local bank, and access your money through ATM withdrawals, cheques, or a debit card.

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 emergency fund.

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 emergency fund. Plus, the longer the maturity of your CD account, the higher your rate of return will be.

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.

Roth IRA

While many people use a Roth IRA to save for retirement, using it for an emergency fund also makes sense. A Roth IRA is a tax-advantaged retirement account but, unlike a 401(k) or traditional IRA, you won’t pay taxes on your contributions. Besides withdrawing your funds tax-free in retirement, a Roth IRA gives you the advantage of withdrawing your contributions at any time without penalty. Since you can withdraw your contributions as needed—for instance, if you have an emergency—a Roth IRA can be a great place to park your emergency fund.

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 emergency fund revolves around the notion that emergency savings should be safely kept in a savings account. But if you’re earning virtually no interest, your savings won’t even keep pace with inflation. While you’re not using it, your money needs a safe place to grow. That’s why it’s smart to invest your emergency fund.

When investing your emergency fund, work within your comfort level. You may keep a month’s worth of expenses in a savings account while holding another six months’ worth of expenses in a money market account. Keep your Roth IRA behind the scenes for the larger “just in case” emergencies.


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