How To Invest An Emergency Fund

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How Much Should I Save For My Emergency Fund

How to Save for an Emergency Fund

Lets talk about how much to save for an emergency fund. If you have consumer debt, I recommend saving a starter emergency fund of $1,000 first. Then, once youre out of debt, its time to beef up that amount and save three to six months of expenses in a fully funded emergency fund. This is the path we teach in the 7 Baby Steps, which is our proven plan for getting out of debt and building wealth.

If youre trying to decide how much to save in your fully funded emergency fund, a good rule of thumb is this: The more stable your income and household are, the less you need in your emergency fund.

If youre part of a two-income household or youve had a steady job for several years, then three months of expenses in your emergency fund is probably just fine. But if youre a one-income family, youre self-employed, or you earn straight commission, then a six-month emergency fund is better for you since a job loss could make you unable to pay the bills.

You should also aim for a six-month emergency fund if someone in your household has a chronic medical condition that requires frequent visits to the doctor or hospital. Even if theres room in your monthly budget to pay for the expenses, its good to be prepared in case a big emergency hits.

An Emergency Fund Can Save You Financially

When you start an emergency fund think of it as a type of insurance policy for you and your family. You have health insurance in case you get sick, car insurance so that youre covered in an accident and an emergency fund if something unplanned or unexpected happens.

The primary investment objective for your emergency reserves is safety, not return, Petersen says.

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How Long Does It Take To Build An Emergency Fund

You might need about 6 to 18 months, depending on your expenses, to build an emergency fund that will be enough to support your sudden financial needs. However, it would be best to save at least twice as much as you expect to spend to ensure that you do not have to make drastic changes in your lifestyle.

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How Much You Need In An Emergency Fund

Even if you can only save a little, make a start and keep saving. The more you can regularly save, the better.

If you put $20 a week into a savings account, you’ll have over $1,040 by the end of the year. That’s the start of a good amount of savings to give you some financial breathing space.

A good target is to have enough in your emergency fund to cover three months of expenses.

Use the savings calculator

It Prevents The Accumulation Of Debt

How to Invest Your Emergency Fund 2022

In the absence of an emergency fund, you may need to borrow money from a bank or credit union to cover emergency expenses.

Whats the problem with that?

High interest rates.

When you borrow money from a bank or credit union, you will pay back with interest . Nathan Morris, author of The Art of Getting Money, is right when he says, every time you borrow money, youre robbing your future self.

An emergency fund provides you with an alternative solution. You can solve your emergencies with your money no interest, no accumulated debt, no threatened relationships.

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Roth Individual Retirement Account

There is a case to be made for putting money into an investment account instead of keeping a more conventional emergency fund. Even bank accounts that earn high-yield interest wonât keep up with rising inflation. Investing your money in a Roth IRA would probably earn more money in the long run.

There is a risk to keeping your emergency fund in a Roth IRA because it could lose value. Choosing more conservative investment options can help lessen the risk of loss.

You can withdraw your contributions from your Roth IRA at any time with no penalty. There may be tax implications and early withdrawal penalties for withdrawing earnings.

Where To Keep Your Emergency Fund

Once you have a plan for how much to save for emergencies, its important to consider where youll keep your emergency savings. Ideally, your emergency fund should be in an account thats easily accessible and that earns some interest. However, the amount of interest you can earn is less important than having your emergency savings readily available and not at risk in the market.

High yield savings accounts are a good option, as they can offer competitive interest rates and come with fewer fees when offered by online banks. In addition, you can link your high-yield savings account to your checking account to make transferring funds between them more manageable.

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Use Your Roth Ira As A Backup Fund

If you are eligible, and you invest in a Roth IRA, its possible to use it as a backup emergency fund. Because you contribute to the Roth IRA with after-tax dollars, you can withdraw contributions without penalty. When you contribute regularly, you can build your Roth IRA to the point where it can make a good stop-gap if needed.

However, while you can withdraw contributions tax-free, you have to be more careful when withdrawing earnings from a Roth IRA. Early withdrawals of earnings come with a penalty from the IRS, so make sure you stick to the money you actually put into the account.

There are some exceptions to this penalty, though: You can withdraw earnings to pay for medical expenses or if youre unemployed. Since these are common emergency needs, it might not be a bad idea to have your Roth IRA waiting in the wings.

Also, realize that you cant get back the time the money spends out of the market. You have 60 days to put the money back if you want to make sure it stays within the annual contribution limit. Its a good idea to have another tax-advantaged retirement account like your 401, and avoid touching that at all. You dont want to risk your future for todays emergency.

Profit From The Weak Economy

Pull From My Investments to Build My Emergency Fund?

Finally, there are some things you can do to get ahead financially when the economy is weak. First, keep an eye on interest rates. While the Federal Reserve is increasing rates to lower inflation, during a recession, it will eventually pivot and begin to lower rates to get the economy moving again. If rates drop below what you are paying on your mortgage, consider a refinance to save money.

If your finances are in good shape, you can reach out to employers you would love to work for. While they are cutting jobs, you can get hired if you agree to a lower salary. Have an agreement so that as the economy improves, your salary will increase in turn.

Another option is to be on the lookout for deals. Retailers will slash prices to move inventory. Contractors might be looking for work. Others might be selling things for cash so they can survive. You might get great deals if you want to update your home or buy a sofa or a car. But you can only take advantage of these deals if your finances are in a good place.

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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our banking reporters and editors focus on the points consumers care about most the best banks, latest rates, different types of accounts, money-saving tips and more so you can feel confident as youre managing your money.

How Much Should You Save

While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months worth of expenses. This amount can seem daunting at first, but the idea is to put a small amount away each week or two to build up to that goal. You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors.

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It Has To Start With A Spending Plan

Start by making a spreadsheet so you know what it takes to run your household on a monthly basis. Your list should include all expenses you may incur such as rent, food, insurance, utilities, car payments, charity, student loans, vacations, said Lori Gross, financial advisor at Outlook Financial Center in Troy, Ohio.

Doing this will help you better understand what’s left over for savings needs such as retirement, college, long-term care and an emergency fund, she said.

Generally experts advise keeping three to 12 months of expenses on tap as an emergency fund. How much buffer will depend on factors such as age, life stage, job security and income predictability.

Should You Invest Your Emergency Fund

HOW TO BUILD EMERGENCY FUND IN 10 WEEKS!

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Exactly $219.25. Thats how much Ive earned in interest on my emergency fund so far this year, at an online bank paying just shy of 1%.

On the one hand, its more than 200 bucks. On the other, its pennies on the dollar, thanks to an era of low interest rates.

Low interest rates have been dragging on for almost seven years. Thats long enough to have some people, including me, rethinking the long-held advice that emergency funds shouldnt be invested because the goal is liquidity, not returns.

Is that antiquated, in the age of credit cards? Is the risk of no return greater than the risk of the market, and subsequently my account, bottoming out?

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Adjust Your Budget Monthly

Being flexible with your budget given inevitable shifts in your incomings and outgoings is essential if you want to avoid becoming demotivated.. Every month its worth checking if you can really afford to put your budgeted amount into your emergency or rainy day fund. Alternatively, you might be able to put in a bit more than you had anticipated!

Time Horizon And Asset Allocation

Consider the fact that the time horizon for your emergency fund is technically continuous and limitless, as unexpected emergencies are, by definition, unpredictable. You may never need to access your emergency fund, which would be a good problem to have. Conversely, you may need to access it within a year. As such, asset allocation must be set initially to be quite conservative and can later be made more risky as the account grows if you prefer.

For example, when starting out, we want a very conservative allocation with something like 10/90 stocks/bonds, but after 20 years, this may slide to 40/60 or even 60/40 stocks/bonds if you want.

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Start By Saving A Realistic Amount

It can take months, or even years, to reach the desired amount for your emergency savings. Dont panic, this is normal!

Its better to start with a small amount so that you dont become discouraged.

Start by figuring out what you can put aside every week. Whether its $50, $20, $5 or some small change, the important thing is to start right now.

In general, its recommended that you save the equivalent of 3 to 6 months of your regular expenses. You can also aim to save 3 to 6 months of income. Both methods are effective, so choose whichever one works for you.

These amounts can sometimes seem out of reach. That is why you should save gradually.

Saving a small amount on a regular basis can make a big difference in the long term.

Figure 1: The progression of various savings amounts

Don’t Get Fooled By Market Rallies

How to build an emergency money fund

A mistake many investors make is to get caught up in bear market rallies. These rallies are often defined as increases in the stock market of 5% or more during a bear market. The pessimism from a weak economy subsides, and optimism takes over. As a result, the stock market rallies.

The problem is this is just a temporary rally. The optimism will fade as more bad news comes out. The market is likely to retreat once again. Some investors take this rally to mean the recession is over and subsequently start investing again, only to lose money when the rally ends.

It is vital that you know bear market rallies happen all the time. Investors should try to stay on top of economic reports, taking them all into account. If one is positive, but the others are still negative, chances are the bear market won’t end anytime soon.

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Quick Ways To Add To Your Rainy Day Fund Jar And Boost Your Emergency Fund

Like most things that are worth doing, beginning is nearly always the hardest part. However, saving money may be easier than you think. If youre struggling to get the ball rolling with your rainy day and emergency saving goals, here are some excellent ways to free up some extra cash to give yourself a head start:

  • Put any tax rebates, work bonuses, or money youve received as a gift straight into your savings funds.
  • Free up some extra money and declutter your home simultaneously by selling any unused items online.
  • Consider taking up a side gig or putting in a few extra hours at work, then using this extra cash to boost your emergency or rainy day funds.
  • Attempt a no-spend month, or if thats too difficult, nominate one day per week where you spend nothing .

You Arent Living Paycheck To Paycheck

Basically, this also goes with having a stable job or side hustle. But if you are not living paycheck to paycheck then it may be a good time to invest.

And its okay if you are currently stuck paycheck to paycheck, I was for almost five years after graduating college and definitely could not invest my savings.

The risk was not worth it, especially when I needed almost every dollar to scrape by for the month.

But once you are out of that rhythm and are not worried about having enough money for life essentials, then it may be time you look at investing your emergency fund.

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Build Your Investment Rainy Day Fund

A smart move is to have cash on hand to take advantage of a drop in the stock market. This allows you to buy low and sell high in a few months, or years, when the market fully recovers and youre ready to sell.

Some like to have 5-10% of their portfolio ready to invest, while others like to have higher amounts. It all depends on your financial situation. The key is not to invest everything at once. As mentioned above, there are rallies during a bear market.

You want to pick and choose when to invest, and you want know when a stock has hit the bottom. In other words, you might think the current price for a stock is cheap, so you take a position only to have the stock drop another 3%.

Timing the market is nearly impossible, and usually has more to do with luck than skill, so your goal here is to do your research and buy when you think the stock is undervalued. If it goes down a little more, then you can buy more. After all, if your research showed it was a good buy at a higher price, it’s likely going to be a better buy at this lower price.

When To Use Your Emergency Fund

How to Build an Emergency Fund

Keep your emergency fund for expenses you need to pay quickly when other money isn’t available. If it can wait, save up for a few weeks and pay it from this saved money instead.

If you need to dip into your emergency fund, remember to top it up again afterwards.

Eva taps into her emergency fund

Eva has been putting a bit of money aside in an emergency fund. Two years ago, she set up an automatic transfer so that $10 from her wage goes into a savings account every payday. Eva has saved over $1,070.

When her car suddenly broke down, she used $1,000 from her emergency fund to cover the cost.

Eva was relieved she didn’t have to pay on a credit card or ask her family for help. She has kept her automatic transfer, so her savings will start topping up again from her next payday.

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