Keep Emergency Fund in Cash or Invest?

 

 

 

                It is often said that people should always keep around six months’ worth of money saved in case of emergency. This money can be used to pay bills, buy food, or pay for other expenses if a family member, or two becomes unemployed. The question is if these savings should be kept at home in cash or if it should be invested in hopes of expanding the amount of money saved.

                New research fund in the Journal of Financial Planning suggests that saving it at home is not a very good idea. With the interest rate going down to zero, having large sums of money will slow down the growth of the emergency fund. If you diversify your money smartly you will see exponential growth while still having access to it whenever you need it. The only risk is having to sell at the most inconvenient time, when markets are tumbling- but the study says that is definitely a risk worth taking!

                Financial planners emphasize the fact that if you are just starting out and do not have much money saved yet, that it is best to keep your money somewhere safe and not take such huge risks yet. However, if you have more “cushion”, then you should go ahead, take a risk, and begin the investment process.

                When considering a risk such as this, it is important to take in to account factors such as how stable your job is, how many unavoidable expenses you have, and whether or not you can depend on your spouse or other family members in case of an emergency. The only thing to worry about is making sure the money is only used for emergencies and not for things such as a sale on a limited edition Birkin Bag!

                Some experts recommend using your Roth IRA during emergencies because you can withdraw money you have deposited at any time free of tax or penalty. However, the important thing is understanding each and every aspect of this. With the Roth IRA, you can only withdraw money you have directly invested, or you can be subject to a ten percent penalty! And who would want that? The entire point of emergency savings is to save, so why risk losing money because you withdrew money for something petty.

                The important thing to remember when investing your emergency savings money is that by withdrawing from it now, you can possibly loose benefits you would have had in the future. So watch where you withdraw and save save save! You’ll be happy in the future!