How risky is it to keep my emergency fund in stocks?
I know this is heresy but if you have funds for significantly more   than 6 months of expenses (let's say 12 months), how risky would it be   to put it all into stock index funds? Quite risky as if you do need to dip into it, how fast could you get the cash? Also, do you realize the tax implications when you do sell the shares should you have an emergency? In the worst-case scenario, let's say you have a financial emergency   at the same time the stock market crashes and loses half its value.   You could still liquidate the rest and have sufficient funds for 6   months. Am I underestimating the risks of this strategy? That's not worst case scenario though. Worst case scenario would be another 9/11 where the markets are closed for nearly a week and you need the money but can't get the funds converted to cash in the bank that you can use. This is in addition to the potential wait for a settlement in the case of using ETFs if you choose to go that way. In the case of money market funds, CDs and other near cash equivalents these can be accessed relatively easily which is part of the point. A staggered approach where some cash is kept in house, some in accounts that can easily accessed and some in other investments may make sense though the breakdown would differ depending on how much risk people are willing to take. If it truly is an emergency fund then the odds of needing it should be   very slim, so why live with near zero return on that money? Something to consider is what is called an emergency here? For some people a sudden $1,000 bill to fix their car that just broke down is an emergency. For others, there could be emergency trips to visit family that may have gotten into accidents or gotten a diagnosis that they may pass away soon. Consider what do you want to call an emergency here as chances are you may not be considering all that people would think is an emergency. There is the question of what other sources of money do you have to cover should issues arise. Keeping your “big emergency” fund in stocks if you have 12 months income saved is OK.   However you should keep your “small emergency” fund in cash.   (However I find that even my stock broker accounts have some cash in them, as I like to let the dividends build up enough to make the dealing charges worthwhile.  You don’t wish to be forced to sell at a bad time due to your boiler needing replacing or your car breaking down.     However if you lost your job in the same week that your boiler broke down and your car needed replacing then being forced to sell stocks at a bad time is not much of an issue. Also if you are saving say 1/3 of your income each month and you have a credit card with large unused credit limit that is paid of each month, then most “small emergency” that are under 2/3 of your monthly income can be covered on the credit card with little or no interest charges. One option is to check you bank balance on the day after you are paid, and if it is more than 2x your monthly income, then move some of it to long term savings, but only if you tend to spend a lot less then you earn most months. There's something very important no one else has mentioned... times when the stock market falls dramatically are often the times when you're most likely to lose your job, and when it's hardest to get loans.  So if you ever do need your emergency fund, it will more than likely be related to a dip in the stock market. I've read the answers and respect the thought behind them.  I'd like to focus on (a) the magnitude of the emergency, and (b) the saving rate of the people affected. 3-6 months is interesting. It's enough not just to fix the car, repair the A/C, etc, but more than enough to lose one's job and recover. (Let's avoid the debate of how long it take to find a job, no amount of 'emergency savings' can solve that.) If one is spending below their means, any unexpected expense that can paid off within, say 3 months, doesn't really need to tap emergency funds (EF). And, at some level of income and retirement savings, one can more easily run a much lower EF.  My own situation - I had 9mo worth of expenses saved as EF. We were living well beneath our means, and I was looking at the difference between our mortgage (6%+) vs bank interest (near 0%). I used the funds to pay down principal, refinanced to a lower rate, and at the same closing got a HELOC. The psychology of this is tough, it then appears that for simple expenses, I'd be borrowing from my HELOC. On the other hand, the choice was between a known cost, the $5K/year the money was costing by sitting there plus the lower rate by going to a non-jumbo loan at the time, vs the risk of using 3% money from the HELOC. In the end, the HELOC was never tapped for more than a small portion of its line, and I never regretted the decision. Ironically, it's the person who isn't saving much that need the EF most. If you are a saver, you need to judge how long it would take to replace the funds.  I offer the above not as a recommendation, but as devil's advocate to the other excellent advice here. All cash flows are a choice, $100 going here, can't go there. I'd slip in a warning that one should capture matching 401(k) contributions, if offered, before funding the EF. And pay down any high interest debt. After that, the decision of how liquid to be is a personal choice, what worked for my wife and me may not be for everyone. "A major danger of keeping ""emergency"" funds in the form of stocks is that many of the scenarios where one would need quick access to the money will also momentarily depress the stock market.  Someone whose emergency funds were in some other form could avoid selling stocks during a momentary downturn, but someone who has no other emergency funds would have no choice but to sell during the downturn (thus losing money as well as making the downturn more significant for everyone else)." "This is basically the short-term/long-term savings question in another form: savings that you hope are long-term but which may turn short-term very suddenly. You can never completely eliminate the risk of being forced to draw on long term savings during a period when the market is doing Something Unpleasant that would force you to take a loss (or right before it does Something Pleasant that you'd like to be fully invested during). You can only pick the degree of risk that you're willing to accept, balancing that hazard of forced sales against the lower-but-more-certain returns you'd get from a money market or equivalent. I'm considered a moderately aggressive investor -- which doesn't mean I'm pushing the boundaries on what I'm buying (not by a long shot!), but which does mean I'm willing to keep more of my money in the market and I'm more likely to hold or buy into a dip than to sell off to try to minimize losses. That level of risk-tolerance also means I'm willing to maintain a ready-cash pool which is sufficient to handle expected emergencies (order of $10K), and not become overly paranoid about lost opportunity value if it turns out that I need to pull a few thou out of the investments. I've got decent health insurance, which helps reduce that risk. I'm also not particularly paranoid about the money. On my current track, I should be able to maintain my current lifestyle ""forever"" without ever touching the principal, as long as inflation and returns remain vaguely reasonable. Having to hit the account for a larger emergency at an Inconvenient Time wouldn't be likely to hurt me too much -- delaying retirement for a year or two, perhaps. It's just money. Emergencies are one of the things it's for. I try not to be stupid about it, but I also try not to stress about it more than I must." From mid 2007 to early 2009 the DJI went down about 50 %. This market setback won't happen on a single day or even a few weeks.  Emergency funds should be in cash only. Markets could be closed for an unknown period of time.  Markets where closed September 11 until September 17 in 2001. I do this very thing, but with asset allocation and risk parity in mind. I disagree with the cash or bust answers above, but many of the aforementioned facts are valuable and I don't mean to undermine them in anyway. That said, let's look at two examples: Option 1: All-in For the sake of argument let's say you had $100k invested in the SPY (S&P 500 ETF) in early 2007, and you kept it there until today. Your lowest balance would have been about $51k, and at this point the possibility of you losing your job was probably at a peak. Today you would be left with $170k assuming no withdrawal. Option 2: Risk Parity BUT if you balanced your investments with a risk parity approach, using negatively correlated asset classes you avoid this dilemma. If you had invested 50% in XLP (Consumer Staples Sector ETF) and 50% in TLT ( Long Term Treasury ETF) your investments low point would have been $88k, and your lowest annual return would be +0.69%. Today you would be left with $214k assuming no withdrawals.  I chose option #2 and it hasn't failed me yet, even in 2016 so far the results are steady and reliably given the reward. My general opinion is simple: when you have money always grow it. Just be sure to cover your ass and prepare for rain. Backtesting for this was done at portfoliovisualizer.com, the one caveat to this approach is that inflation and a lack of international exposure are a risk here.
My take on this is that this reduces your liquidity risk. Stocks, bonds and many other investment vehicles on secondary markets you may think of are highly liquid but they still require that markets are open and then an additional 3-5 business days to settle the transaction and for funds to make their way to your bank account.  If you require funds immediately because of an emergency, this 3-5 business days (which gets longer as week-ends and holidays are in the way) can cause a lot of discomfort which may be worth a small loss in potential ROI.  Think of your car breaking down or a water pipe exploding in your home and having to wait for the stock sale to process before you can make the payment. Admittedly, you have other options such as margin loans and credit cards that can help absorb the shock in such cases but they may not be sufficient or cause you to pay interest or fees if left unpaid. "You're talking about money in a savings account, and avoiding the risks posed by an ongoing crisis, and avoiding risk. If you are risk-averse, and likely to need your money in the short term, you should not put your money in the stock market, even in ""safe"" stocks like P&G/Coca-Cola/etc. Even these safe stocks are at risk of wild price swings in the short- to intermediate-term, especially in the event of international crises such as major European debt defaults and the like. These stocks are suitable for long-term growth objectives, but they are not as a replacement for a savings account. Coca-Cola lost a third of its value between 2007 and 2009. (It's recovered, and is currently doing better than ever.) P&G went from $74/share to $46/share. (It's partially recovered and back at $63). On the other hand, these stocks may indeed be suitable as long-term investments to protect you against local currency inflation. And yes, they even pay dividends. If you're after this investment, a good option is probably a sector-specific exchange-traded fund, such as a consumer-staples ETF. It will likely be more diversified and safer than anything you could come up with using a list of individual stocks. You can also investigate recommendations that show up when you search for a ""defensive ETF"". If you do not wish to buy the ETF directly, you can also look at listings of the ETF's holdings. Read the prospectus for an idea of the risks associated with these funds. You can buy these funds with any brokerage that gives you access to US stock exchanges." I would say that, for the most part, money should not be invested in the stock market or real estate.  Mostly this money should be kept in savings: I feel like your emergency fund is light.  You do not indicate what your expenses are per month, but unless you can live off of 1K/month, that is pretty low.  I would bump that to about 15K, but that really depends upon your expenses. You may want to go higher when you consider your real estate investments.  What happens if a water heater needs replacement?  (41K left) EDIT:  As stated you could reduce your expenses, in an emergency, to 2K.  At the bare minimum your emergency fund should be 12K.  I'd still be likely to have more as you don't have any money in sinking funds or designated savings and the real estate leaves you a bit exposed.  In your shoes, I'd have 12K as a general emergency fund.  Another 5K in a car fund (I don't mind driving a 5,000 car), 5k in a real estate/home repair fund, and save about 400 per month for yearly insurance and tax costs.  Your first point is incorrect, you do have debt in the form of a car lease.  That car needs to be replaced, and you might want to upgrade the other car.  How much?  Perhaps spend 12K on each and sell the existing car for 2K?  (19K left). Congratulations on attempting to bootstrap a software company.  What kind of cash do you anticipate needing?  How about keeping 10K designated for that?  (9K left) Assuming that medical school will run you about 50K per year for 4 years how do you propose to pay for it?  Assuming that you put away 4K per month for 24 months and have 9K, you will come up about 95K short assuming some interests in your favor.  The time frame is too short to invest it, so you are stuck with crappy bank rates. "Two options not mentioned: -No information about your emergency fund in your question. If you don't have 6 months of expenses saved up in a ""safe"" place (high yield savings account or money market fund) I'd add to that first. -Could you auto-withdraw the amount over six months, then when you can start contributing, contribute twice as much so you are still putting in $18,000 a ""year""? The amount you pulled into savings the first 6 months could be used to make up for the extra income coming out after the six months are over. Depending on your income, and since you have the ability to save, it's important not to ""lose"" access to these tax efficient accounts. And also... -After-tax brokerage account (as mentioned above) is also fine. But if you will use this money for downpayment on a home or something similar within the next five years, I wouldn't recommend investing it. However, having money invested in an after-tax account isn't a terrible thing, yes you'll get taxed when you sell the investments but you have a lot of flexibility to access that money at any time, unlike your retirement accounts." An emergency fund is about managing risk. What would you do if your furnace, water heater, and cars all broke down at the same time? Being in Michigan, I can imagine that you wouldn't want to take cold showers, heat the entire house by wood fire, and walk to work every day. So how do you manage this risk? What would happen if you lost your job and couldn't find one for a few months? By only having $5k in the bank in an emergency fund, you are putting your family at risk. If these sorts of things happened, you would be in trouble. You would have to borrow money either hurting equity in the home that you have worked hard to build up, or by some other means. You and your spouse should sit down and decide what a good emergency fund looks like for your family. A reserve of 3-6 months of expenses is a good emergency fund. This could cover your family in the event of a lost job while you look for a new one. It would also cover you when Murphy strikes and things break down all at the same time. Once you and your spouse have determined how much you want to set aside, you two must determine how you will get there. Maybe you put in some extra hours at work, maybe you lower the retirement contributions temporarily, maybe you try to pay off the car as quickly as possible then put what you were paying on the car into the emergency fund. It will likely take a mix of things to get you there. You don't have to get it done in a day, a month, or even a year. But once you have that emergency fund fully funded, you will feel better. What may be a catastrophe now will be a minor annoyance with a fully funded emergency fund. Finally, I'd recommend going to your bank and setting up a separate account for this emergency fund. A separate account specifically labeled as your emergency fund. This way you will think twice before spending it on a non-emergency. The catch is that you're doing a form of leveraged investing. In other words, you're gambling on the stock market using money that you've borrowed. While it's not as dangerous as say, getting money from a loan shark to play blackjack in Vegas, there is always the chance that markets can collapse and your investment's value will drop rapidly. The amount of risk really depends on what specific investments you choose and how diversified they are - if you buy only Canadian stocks then you're at risk of losing a lot if something happened to our economy. But if your Canadian equities only amount to 3.6% of your total (which is Canada's share of the world market), and you're holding stocks in many different countries then the diversification will reduce your overall risk.  The reason I mention that is because many people using the Smith Maneuver are only buying Canadian high-yield dividend stocks, so that they can use the dividends to accelerate the Smith Maneuver process (use the dividends to pay down the mortgage, then borrow more and invest it). They prefer Canadian equities because of preferential tax treatment of the dividend income (in non-registered accounts). But if something happened to those Canadian companies, they stand to lose much of the investment value and suddenly they have the extra debt (the amount borrowed from a HELOC, or from a re-advanceable mortgage) without enough value in the investments to offset it. This could mean that they will not be able to pay off the mortgage by the time they retire! You can only lose your 7%. The idea that a certain security is more volatile than others in your portfolio does not mean that you can lose more than the value of the investment. The one exception is that a short position has unlimited downside, but i dont think there are any straight short mutual funds. "You are not wrong - just about anything can be charged and paid off in 30 days with a sale of non-liquid investments.  So there are not any emergencies I can think of that require completely liquid funds (cash). For me, the risks are more behavioral than financial: I'm not saying it's a ridiculous, stupid idea, and these are all ""what-if""s that can be countered with discipline and wise decisions, but having an emergency fund in cash certainly makes all of this simpler and reduces risk. If you have investments that you would have no hesitation liquidating to cover an emergency, then you can make it work.  For most people, the choice is either paying cash, or charging it without having investment funds to pay it off, and they're back in the cycle of paying minimum payments for months and drowning in debt." "Since this is your emergency fund, you generally want to avoid volatility while keeping pace with inflation.  You really shouldn't be looking for aggressive growth (which means taking on some risk).  That comes from money outside of the emergency fund. The simplest thing to do would be to shop around for a different savings account.  There are some deals out there that are better than ING.  Here is a good list. The ""traditional"" places to keep an emergency fund are Money Market Mutual Funds (not to be confused with Money Market Accounts).  They are considered extremely safe investments.  However, the returns on such a fund is pretty low these days, often lower than a high-yield online savings account. The next step up would be a bond fund (more volatility, slightly better return).  Pick something that relies on Government bonds, not ""high-yield"" (junk) bonds or anything crazy like that. Fidelity Four in One comes pretty close to your ""index of indexes"" request, but it isn't the most stable thing.  You'd probably do better with a safer investment." "As long as you are disciplined about it, you can certainly have your emergency fund and other savings funds in one account.  Multiple accounts may incur added costs, since you may not have the minimum balances to avoid the fees.  Some banks provide tools or account features to help track separate ""buckets"" of funds within one account. One important principle for an emergency fund is liquidity.  Those funds should be easily accessible, ideally without withdrawal penalties or transaction costs.  For this reason, certificates of deposit (CD) or money market funds should be avoided for this purpose. Another important principle, for any savings fund, is capital preservation/safety.  That money should not be held in risky assets.  Depending on the purpose of the fund, you may consider other options beyond just a savings account.  For example, you may consider placing funds for a house in CD(s) early on, before you are actually looking for the house.  As you get closer to having enough for a down payment, you would shift that money into a savings account.  One drawback of such an approach is the extra management that this requires on your part. A spreadsheet is a simple way to track these funds, though that requires more manual management and discipline to do that tracking.  It also requires some knowledge of spreadsheets, but it provides you with flexibility so you can create a process that works well for you.  Any accounting software should allow you to do this in some fashion with (hopefully) less effort than maintaining a spreadsheet, though you may have to do things in a certain way that may be awkward in some cases. Those are the basic principles that come to mind.  I am sure others can provide more specific suggestions, like banks which allow you track buckets of funds or accounting software that can help you track the funds." i think emergency fund should be in a more liquid account (like regular saving or money market) so you can withdraw money any time, while your regular saving can be tied up in a long term CD, bond or an investment account. "Now store the money in -- okay here, think about a realistic worst case scenario.  Not zombie attack or meteor mega-strike, but the kinds  in which you are not entirely helpless: job loss stacked on top of the worst recession since the Great Depression, along with credit drying up so you can't just borrow your way through the hard times.   Store the money in an account and investment which is  relatively liquid, meaning you could extract cash value from it fairly easily in a worst case scneario.  Safe -- essentially impossible to lose significant value in a worst case scenario.  (or, you only count the part of its value that's sure to be there in a worst case.) If you're much too cool for an emergency fund, then sorry to waste your valuable time!    For the rest of us, it's a planning tool.   Even dot-coms do this: it's called a ""burn-rate"" and they know exactly how many more weeks their VC can fund operations.    Of course in practicality, it may not go to X months of routine expenses. Most of it may get burned up in month 2 on a new transmission.  You can't really predict this stuff, the ""X month"" paradigm is just an arm-wave.   For the financially uneducated, it's also a training tool.   In the US, school does not provide financial education.  Most people get financial habits from their parents, and like most family lessons, they are deeply emotionally wired, even if they are unconscious of that fact.  For instance, some people don't ask for the salaries they deserve, and spend lavishly until the checkbook is zero - they literally push money away.  Suffice it to say, it's a challenge to get some people to even realize that savings is a thing, when they have never in their whole lives been able to hold onto more than $20 for more than a week. The concept of an emergency fund is a sellable way to break through that ""I can't save"" mental-block. So I can see where you might think the emergency fund is greasy kidstuff.   Fair.  But it's not just that, it's also a very practical planning tool." (To be clear, IRA accounts are just wrappers, and can contain a large variety of investments. I'm restricting myself to the usual setup of investment in the stock market.) So, let's say you have $5000 in savings, as an emergency fund. Of the top of my head, putting some of it into a Roth IRA could backfire in the following ways: The basic principle here is that the stock market is not a good place for storing your emergency cash, which needs to be secured against loss and immediately accessible. Once you're happy with your level of emergency cash, however, tax-advantaged investment accounts are a reasonable next step. "Yes... but it is a matter of balancing risks.  It is wiser to keep a small amount of ""ready cash"" as an emergency/buffer -- and to suffer the gradual loss to inflation...  Than it is risk becoming ""stuck"" in an emergency with zero dollars in any (low or no cost) source of funds -- those kinds of ""emergencies"" ($500 or $1,000 ""unexpected/unbudgeted"" expenses) are fairly frequent and virtually inevitable.  You lose vastly MORE money when you are forced to borrow those amounts (interest -- even **low-rate** loans -- is virtually always higher than the average inflation rate)." Yes, there are some real dangers in having your money locked into an investment. Those dangers are well worth thinking about and planning for. Where you are going off the rails is acting like those are the only dangers to your money, and perhaps having an exaggerated idea of the size of the dangers. It is an excellent idea to keep an emergency fund with a few months living expenses in a readily accessible savings or checking account. However, a standard retail savings account is always going to pay less in interest then you are loosing through inflation. We're living in a low-inflation period, but it's still continuously eating away at the value of your savings. It makes sense to accept the danger of inflation for your emergency fund, but probably not for your retirement savings. To reduce the hazards of inflation, you need to find an investment that has some chance of paying more than the inflation rate. This is inevitably going to mean locking up your money for some period of time or accepting some other type of risk. There is no guaranteed safe path in the world. You can only do your best to understand the risks you are running. As an example, you could put your savings in a CD rather than a vanilla savings account. A CD these days won't pay much in interest, but it will be more than a savings account. However, you have to commit to a term for the CD. If you take your money out early you will have to pay a penalty. How much of a penalty? In the worse case it could be in the neighborhood of 4% of the amount you withdraw. So, yeah if you deposit $10,000 in a 5-year CD and end up needing it all back the very next day, you could end up paying the bank $400.  If you withdraw money from a 401k before you are 59 1/2, you will pay a 10% penalty, and you will have to have income tax withheld on the amount you withdraw. On the other hand, if your employer matches 100% of your 401k contributions, you could be throwing away 50% of your possible retirement savings because of your fear of the possibility of a 10% loss! In addition 401k plans do have some exceptions to the early withdrawal penalty. There are provisions for medical emergencies and home purchases for example. However, the qualifications are not entirely straight-forward, and you should read up on them before enrolling. The real answer to your fears is planning. Figure out your living expenses. Figure out how much you want in an emergency fund. Figure out when you will be wanting to buy a house, have a child, or go back to school. Set aside the savings you'll need for all those, and then for the remainder of your money you can consider long term investments with some confidence that you probably won't need to face the early withdrawal penalties.