I recently wrote an article about the best savings accounts and received quite a few comments about investing the money in “safe, high-rated” stocks instead of a 1-1.5% interest savings account.
I would love to do this – invest in stocks and get a possible 7-10% return on my money instead of the paltry under-2% return that savings accounts provide, except for one main problem:
I don’t have enough in my emergency fund yet.
What is an emergency fund? It’s a cushion of money that isn’t invested in anything which provides a cushion in case of a money emergency. This money must be immediately accessible. The money can’t suddenly drop to near zero because of a market freefall- it needs to be reliably there for you.
How much money should be in this emergency fund?
Most experts recommend emergency funds hold between 6-8 months of income. This means that if you make $3000 a month, an emergency fund should have $18,000- $24,000.
Why do I need so much money in my emergency fund?
What if, god forbid, you lost your job tomorrow or got hit by a car and were stuck with insane medical bills and possible disability that prevented you from working? It might take awhile to get back on track again. If you lost your income for a few months, you need to be able to cover major expenses for a that time with a cushion of money. Otherwise you might go into extreme debt. And if you go into debt, you will get hit with insane interest on any kind of loans you might have to take out. An emergency fund is like a loan to yourself…with no interest.
Why can’t I invest this emergency fund?
Because even with the “safest, top rate stocks,” the market isn’t safe…you can’t time the market. Your cushion of invested emergency money could drop down to next to nothing at any point. And if your emergency fund is invested and you have an emergency, you’ll need to pull the money from the market. And if the market is at a ‘bad’ time, you won’t be able to wait until it recovers, so you’ll be at a major disadvantage and could end up pulling your money at the worst possible time and losing a ton of $$$.
If my emergency fund is already at 6-8 months, can I invest additional money?
Sure. I would recommend investing in a retirement account first, such as a Roth IRA, or your work 401k, and contributing the max, or at least 15% of your monthly income. I recommend starting with retirement investing because retirement funds are tax protected, meaning you won’t get taxed on your earnings right now (you’ll NEVER get taxed on them with Roth IRAs). THEN if you still have additional income, go ahead and invest intelligently…maybe in some index funds. Or, if you have what some of my favorite financial advisors call a “burning garbage pile” fund, invest some money in individual stocks…but only invest money you’re cool with possibly losing. Hence the ‘burning garbage pile.”
I know it’s hard to save for emergencies- I’m not fully funded myself…but I’m working on it. Do what you can. Be safe and be prepared!
And of course, let me know in the comments if you have any questions.