It’s important to find the right home for your emergency cash reserves.
- Everyone should have a healthy savings account to cover unexpected bills.
- Tempting as it may be to invest your emergency fund, doing so is a dangerous move you might regret.
- An emergency fund should be accessible at a moment’s notice.
We all need emergency savings to buy ourselves some protection against life’s many unknowns. After all, you never know when your car might stop running, your roof might need to be replaced, or your employer might downsize your department, leaving you out of a job.
Financial guru Suze Orman says that it’s a good idea to have enough money in your savings account to cover eight to 12 months of essential bills. Now, that may seem like a tall order, but if you lose your job during a recession, it’s conceivable that it could take close to a year to be gainfully employed again. And you’ll need a way to pay your bills while you’re out of work. Similarly, an injury or illness might sideline you for that long a timeframe.
Related: Emergency Fund Calculator
Given that building an eight- to 12-month emergency fund is no easy feat, you may be tempted to invest some of that cash in the hopes of growing it into a larger sum. But Orman insists that’s a huge mistake you might sorely regret.
Why your emergency fund needs to sit in cash
If you’re working toward a far-off milestone like retirement, then it absolutely pays to invest your money in an IRA or brokerage account rather than simply let it sit in cash earning minimal interest. But as a general rule, Orman insists you shouldn’t invest money you might need within five years. And since emergency savings fall into that category, you should keep the cash you have earmarked for unplanned expenses in a savings account.
Keeping your emergency fund in cash may mean losing out on higher returns. But it could also protect you from taking losses.
Let’s imagine you have a $10,000 emergency fund and encounter a $10,000 home repair. If that money is in an FDIC-insured savings account, it’s guaranteed to be there in full at the time of your withdrawal. But if you invest that money instead, it might only be worth $8,000 at the time you need to access it if the market tanks …….