Should You Invest Your Emergency Fund?
If the recent government shutdown has taught us anything, it’s to always expect the unexpected. Like the furloughed government workers, you may experience a surprise setback, such as a layoff, at any time. In that case, having liquid savings on hand would make a big difference in your daily life.
However, if you are wondering if you should invest your emergency fund, there are plenty of options at your disposal, from stocks and bonds to even various forms of cryptocurrency. Let’s take a look at the pros and cons of investing your emergency fund.
To Invest or Not to Invest: What’s the Best Choice?
As far as your emergency fund is concerned, the decision to invest is a highly personal decision that’s dependent on a variety of factors. If you have a substantial nest egg in your emergency fund, then it probably wouldn’t hurt to withdraw a portion of your savings for the purpose of investment.
On the other hand, if you work as an independent contractor or in an industry that changes rapidly with little job security, you may not want to take a chance on a poor investment decision. Ask yourself if you’re willing to risk all or part of your emergency fund on a failed investment prior to withdrawing any money from your savings account.
Additionally, if you don't have much money to invest, there aren't going to be as many investment options available since many options have investment minimums that need to be met.
Savings Accounts and Interest Rates
For most of us, our emergency fund is tucked away in a savings account, collecting a minimal amount of interest every year. As of January 2019, savings account interest rates averaged about 2.25 percent annually, according to NerdWallet.
There are many factors to consider if you want to withdraw all or part of your emergency fund. For example, if your emergency fund is wrapped up in a certificate of deposit (CD), your bank may charge a penalty fee in the event of an early withdrawal.
And what if you or a family member falls ill and racks up expensive hospital bills? You may find the cost to be a hefty burden if you have part of your emergency fund tied up in the stock market or in bonds.
Smartly Investing Your Emergency Fund
But keeping your emergency fund intact isn’t without its problems. When you’re weighing the benefits of investing your savings, consider the cost of inflation.
When factoring in the cost of inflation the overall value of your liquid savings may stay constant or even be reduced, even when the interest you earn is factored in. It’s the biggest risk that comes with a cash savings account, and many people opt to invest all or part of their emergency fund rather than put it aside due to inflation.
If you’re considering the investment of your emergency fund, and you don't feel comfortable using some of the many online investment options these days, you could always hire a financial advisor who can help you grow your emergency fund with a portfolio that’s tailored to your needs.
The Cryptocurrency Investment Market
In recent years, cryptocurrency has been a major player in the investment world. But is investing in cryptocurrency, which includes Bitcoin, Ethereum, and Zcash, a smart choice where your emergency fund is concerned?
Financial experts say no, urging people to invest in cryptocurrency with the utmost caution. As of July 2018, there were more than 1500 different digital currencies, many of which are unstable.
The goal of an emergency fund is to help you survive an emergency that may arise. It isn't meant to be an account that is so volatile that you could lose 50% value in a couple of months. And that very well could happen if you invested your emergency fund in cryptocurrency.
In comparison to dividend-paying stocks, the only source of digital currency return is price increase. In short, stocks are backed by a company’s potential and cash flow while cryptocurrency stands alone, its worth determined solely by supply and demand.
Your emergency fund serves as a tangible safety net that you can turn to when the unexpected happens. But when left alone in a savings account, it doesn’t collect much interest and may even lose value thanks to inflation.
In the end, the decision to invest or not invest your savings is a personal decision, and there are benefits and pitfalls to both choices.