Why You Should Never Invest Your Emergency Fund

September 15, 2020
Share |

I teach that everyone should have an emergency fund of 3-6 months of expenses. Typically 3 months is sufficient if you have a secure job with consistent pay or there is a dual income household. Typically 6 months is best if you have inconsistent pay (commissions, bonus, etc) or only one household member works.

 

I am often asked what to do with such a large amount of cash just lying around. The best answer is to keep it lying around. I get it - if you have $8,000/month in expenses, $25,000 to $50,000 in savings might feel like too much. But these past few months with the Covid pandemic likely reminded you that it’s not. Even if you didn’t lose your job or take a pay cut, you likely know many who did. And that is one of the main reasons for keeping this cash on hand.

 

I find it helpful to think of my emergency fund as insurance. I could save a lot each month by not paying premiums and invest that money if I wanted to. But we all can clearly see the risks of losing a home, getting in an accident, or passing away. This other risk is not as clearly seen, but still there. 

 

You may say, if I come on hard times, I’ll borrow against my house, get a personal loan, or take it out of investments. As many people found out in 2008, at the same time they needed a loan, no one would lend. At the time they needed it take it from investments, their investments were getting clobbered. As the saying goes, 'when it rains, it pours.'

 

 

Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.