Should You Invest Your Emergency Fund?

Originally posted on Money with Merne’s Facebook Page on March 21-22, 2017:

One of my financial follower friends mentioned another finance blog and a specific article suggesting you should invest your emergency fund and asked me my thoughts on it. I read the article and we both agreed that we disagreed!

The whole point of an emergency fund is to have access to cash FAST. The going advice is to have 3-6 months (or 8 if you listen to Suze Orman) of expenses saved. And because of this advice, the main thinking is that an emergency fund is there if you lose your job and you’re able to be without an income for a few months. So the article was saying, if you have a stable job (seriously, I don’t think ANYONE can count on the stability of their job these days) or you have other sources of income (like driving for uber) then you can invest your emergency fund. But the thing is, it’s not just for losing your job. It’s can be for unexpected emergencies like big medical bills, funeral costs, car repairs, house maintenance, etc. I still think you need to keep that money liquid!

If you still struggle with the idea of keeping such a large sum of money out of the market, here are some compromises you can make:

1. If the amount you need in savings is daunting:
-Aim for a specific dollar amount that would cover most of the emergencies you can think of. $5,000-$10,000? More? Something is better than nothing!
-Maybe you need to cut down on your expenses a bit to make the overall amount lower. Lower expenses will help you build wealth in the long run too!

2. If you really just want your money to work for you and want to make sure you don’t have too easy access to it (so you are not tempted to use it for NON-emergencies), a Suze-approved strategy is to contribute to a Roth IRA and use that as your emergency fund since you can withdraw your contributions without penalty or tax.

3. Build up your emergency fund and then make loans to yourself. This is a strategy I started in the last year. When I knew that in December we’d get reimbursed for our dependent care FSA, I took that amount from my emergency fund and put it toward my husband’s student loans earlier in the year. In December, we repaid the emergency fund. Then we saved on interest! I did it again when I had some big medical bills, I knew I would have the money later in the year in my HSA, so I put the medical bill on my credit card (earning rewards points), paid the card balance in full with money from my emergency fund, and then repaid the emergency fund later in the year with HSA funds. I will say that I only depleted my fund 20% at the most and still had plenty of liquid cash for actual emergencies should they have occurred.