why do I need an emergency fund if I already have investments?
"Emergency funds have a very specific and obvious benefit; you'll have money sitting around in case you need it.  A lot of people think a big car repair or some unexpected home repair is an emergency, and that's fine.  Emergency also expands up to ""I lost my job four months ago and we're a year in to a recession, the stock market is down 30% and I need to pay my rent or mortgage.""  Sure, you could just sell some of your stocks that have lost 30% and pay your rent. I know nobody likes to think about it, but the stock market can go down.  I know nobody likes to think about it, but the economy can slink in to a recession.  In fact, here's a small list of recent U.S. recessions: No competent investment adviser would advise that your emergency funds should be subject to market volatility because that completely defeats the purpose of an emergency fund. It's possible that this manager wants you to indicate a separate emergency fund to allocate a portion of your account to a low volatility US Treasury fund or something of the like, this would be materially different than investing in a broad market/large cap fund like VOO or VTI.  The effects of inflation are not so bad that you should put your emergency money in the market.  Who cares what inflation was if you have to sell an asset at a loss to pay rent?  One last point.  Index fund ETFs are not ""safe.""  Investing in diversified funds is safER than buying individual company stocks." 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. "There are a few major risks to doing something like that. First, you should never invest money you can't afford to lose. An emergency fund is money you can't afford to lose - by definition, you may need to have quick access to that money. If you determine that you need, for example, $3000 in emergency savings, that means that you need to have at least $3000 at all times - if you lose $500, then you now only have $2500 in emergency savings. Imagine what could've happened if you had invested your emergency savings during the 2008 crash, for example; you could easily have been in a position where you lost both your job and a good portion of your emergency savings at the same time, which is a terrible position to be in. If the car breaks down, you can't really say ""now's a bad time, wait until the stock market bounces back."" Second, with brokerage accounts, there may be a delay before you can actually access the money or transfer it to an account that you can actually withdraw cash from or write checks against (but some of this depends on the exact arrangement you have with your bank). This can be a problem if you're in a situation where you need immediate access to the money - if your furnace breaks in the middle of winter, you probably don't want to wait a few days for the sale and transfer to go through before you can have it fixed. Third, you can be forced to sell the investments at an unfavorable price because you're not sure when you're going to need it. You'd also likely incur trading fees and/or early withdrawal penalties when you tried to withdraw the money. Think about it this way: if you buy a bond that matures in 5 years, you're effectively betting that you won't have an emergency for the next 5 years. If you do, you'll have to either sell the bond or, if you're allowed to get the money back early, you'll likely forfeit a good amount of the interest you earned in the process (which kind of kills the point of buying the bond in the first place). Edit: As @Barmar pointed out in the comments, you may also have to pay taxes on the profits if you sell at a favorable price. In the U.S. at least, capital gains on stuff held for less than a year is taxed at your ordinary income tax rate and stuff held longer than a year is taxed at the long-term capital gains tax rate. So, if you hold the investment for less than a year, you're opening yourself up to the risks of short-term stock fluctuations as well as potential tax penalties, so if you put your emergency fund in stocks you're essentially betting that you won't have an emergency that year (which by definition you can't know). The purpose of an emergency fund is just that - to be an emergency fund. Its purpose isn't really to make money." You're absolutely correct. If you have maxed out your retirement investment vehicles and have some additional investments in a regular taxable account, you can certainly use that as an emergency source of funds without much downside. (You can borrow from many retirement account but there are downsides.) Sure, you risk selling at a loss when/if you need the money, but I'd rather take the risk and take advantage of the investment growth that I would miss if I kept my emergency fund in cash or money market. And you can choose how much risk you're willing to take on when you invest the money. From a budgeting perspective, the emergency fund is a category in which you've budgeted funds for the unexpected.  These are things that weren't able to be predicted and budgeted for in advance, or things that exceeded the expected costs.  For example you might budget $150 per month for car maintenance, and typically spend some of it while the rest builds up over time for unexpected repairs, so you have a few hundred available for that.  But this month your transmission died and you have a $3,000 bill. You'll then fund most of this out of your emergency fund.  This doesn't cover where to store that money though, which leads me to my next point.  Emergencies are emergencies because they come without warning, without you having a chance to plan. Thefore the primary things you want in an emergency fund account are stability and quick access.  You can structure investments to be whatever you think of as safe or stable but you don't want to be thinking about whether it's a good time to sell when you need the money right now.  But the bigger problem is access. When you need the funds on a weekend, holiday, anytime outside of market hours, you're not going to be able to just sell some stocks and go to an ATM. This is the reason why it's recommended to have these funds in a checking or savings account usually. The reason I mentioned the budgeting side first is because I wanted to point out that if you're budgeting well, most of the unexpected expenses you have should have been expected in a sense; you can still plan for something without knowing when or if it will happen.  So in the example of a car repair, ideally you're already budgeting for possible repairs, if you own a home you're budgeting for things that would go wrong, budgeting for speeding tickets, for surprise out of pocket medical costs, etc. These then become part of your normal budget: they aren't part of the emergency fund anymore.  The bright side about budgeting for something unexpected is that you know what that money is for, and do you likely also know how quickly you'll need it. For example you know if you have unexpected medical costs that happen very quickly, you're not likely you need a bag of cash on a moment's notice.  So those last two points lead to the fact that your actual emergency fund, the dollars that are for things you simply could not foresee, will be relatively small. A few thousand dollars or so in most cases. If you've got things structured like this, you'll be happy to have a few grand available at a moment's notice.  The bulk of the money you would use for other surprise expenses (or things like 6 months of living expenses) is represented in other specific categories and you already know the timeframe in which you need it (probably enough time that it could be invested, risk to taste). In short: by expecting the unexpected, you can sidestep this issue and not worry so much about missed returns on the emergency fund. "Given that the 6 answers all advocate similar information, let me offer you the alternate scenario - You earn $60K and have an employer offering a 50% match on all deposits. All deposits. (Note, I recently read a Q&A here describing such an offer. If I see it again, I'll link).  Let the thought of the above settle in. You think about the fact that $42K isn't a bad salary, and decide to deposit 30%, to gain the full match on your $18K deposit. Now, you budget to live your life, pay your bills, etc, but it's tight. When you accumulate $2000, and a strong want comes up (a toy, a trip, anything, no judgement) you have a tough decision. You think to yourself, ""after the match, I am literally saving 45% of my income. I'm on a pace to have the ability to retire in 20 years. Why do I need to save even more?""  Your budget has enough discretionary spending that if you have a $2000 'emergency', you charge it and pay it off over the next 6-8 months. Much larger, and you know that your super-funded 401(k) has the ability to tap a loan. Your choice to turn away from the common wisdom has the recommended $20K (about 6 months of your spending) sitting in your 401(k), pretax deposited as $26K, and matched to nearly $40K, growing long term.  Note: This is a devil's advocate answer. Had I been the first to answer, it would reflect the above.  In my own experience, when I got married, we built up the proper emergency fund. As interest rates fell, we looked at our mortgage balance, and agreed that paying down the loan would enable us to refinance and save enough in mortgage interest that the net effect was as if we were getting 8% on the money. At the same time as we got that new mortgage, the bank offered a HELOC, which I never needed to use. Did we somehow create high risk? Perhaps. Given that my wife and I were both still working, and had similar incomes, it seemed reasonable." I treat the concept of emergency funds as a series of financial buffers. One layer is that I have various credit cards with a small positive balance, that I can max out in an emergency should I go broke and not be in employment (those have saved me once or twice) My final level of emergency funds, is kept at home in the form of cash, I've never needed it, but it protects against getting locked out of the financial system (I lose my debit cards, banking system freezes all withdrawals, zombie invasion). It also doubles as my destitution fund, as if all else fails I still have raw cash to buy food and thus I won't starve (at least for a few months). Let me first start by defining an emergency fund. This is money which is: Because emergency's usually need to be deal with ASAP, boiler breaks, gears box in a car. Generally you need these to be solved as soon as possible, because ou depend on these things working and you can't budget for this type of expenditure using just your monthly salary. This is a personal opinion but I prefer investment types that don't have another fee on access. I really don't like having another fee on top on money that I need right now. Investment Options: Market based investments should be seen as long term investments, therefore they do not really satisfy requirement one, they can also have broker fees, therefore you might pay a small extra charge for taking money out, and so do not satisfy requirement two. Investment Options for Emergency Funds You want to get the best return on your money even if it's your emergency fund. So use regular saving accounts, but from you emergency fund or use tax effective savings accounts, like a cash ISA if based in the UK. Don't think of an emergency money as just sitting there, you have options just makes sure the options fit the requirements. UPDATE Given feedback I appreciate there are levels of emergency fund, the above details things which might be about 1-2 month salary in cost, car repairs, leaks, boiler repairs. Now I have another fund which is in P2P funds which is higher risk than a deposit account but then gives me a better return and is less subject to market fluctuations and it would be the place I go to for loss of job level emergencies say 6 months of salary, this takes a bit longer to access but given I have the above emergency fund I have given myself time to get the money from the P2P account. It all depends on the liquidity of your investments some examples: You can mitigate only the risk that you can control. It is always good to have:
While it’s your personal choice on HOW you save for later its essential that you save. My sister works in a bank and recommended me not to put any money into retirement plans since the tax-advances seem fine but have to paid back when you take the money out of the accounts (in Switzerland, don't know about the united states). Many reasons exist that you suddenly need the money: Buying a house, needing a new car, health issues or just leaving the country forever (and the government trying to make it as hard as possible for you to get your money back). I recommend putting it on a savings account on a different bank that you normally use, without any cards and so on. In short: It can be dangerous to have money locked away – especially if you could easily have it at your hands and you know you're able to manage it. "The mix how how you present this feels contradictory. You would pull a 'major' portion from the emergency fund (EF), but at the same time, you'll replace it in a month.  The first bit scares me, this is not the purpose of that fund, and the issue is the aspect of money that's psychological. Money is a habit, if you justify this use of the EF now, it gets progressively easier for this purchase or that, and the fund loses its intended purpose. If the second half is accurate, that your income would replace that money in a month, i'd say the fund wasn't fully funded to its proper level, 6-9 months of all expenses to get you though issues as bad as a job loss.  The great thing I see in your question is what's missing. You're not looking to buy a car with a loan. That puts you in a good situation, and should push those answering to cut you some slack on the one month ""bridge loan"" from your own savings.  Edit - OP add 2 key points, His EF is 3 years expenses (wow, kudos to him!), but he's living like a student (i.e. with parents, which keeps his costs low). If this latter observation seems judgmental, I'll re-edit. The finances of everyone would be far better off if we adopted multigenerational living. The young could save as Fahad is doing, and when parents retire, they can know they are cared for. In the US, I'd say ""when you move out, your expenses will go up drastically,"" but in this case, that may not happen, or not soon. This is my observation the world is a big place and our answers need to fit the OP's situation, not assume our own standards apply to all.  Buy the better car. You saved. You earned it." I would disagree with your analysis.  To me there are two purposes for a money market (MM): Your emergency fund should be from 3 to 6 months of expenses.  Think of it of an insurance policy against Murphy.  You may want to have some money designated for big expenses, or even sinking funds.  For example, I keep some money in a MM for a car as both the wife, daughter, and I driver older vehicles.  I may need to replace them. If you were planning on making a larger purchase car, house, boat, engagement ring I would put the money in a MM fund so you are not subject to the whims of the market.   After that you are free to invest all your money.  Its likely that you should have some money outside of tax advantaged funds so if you want to start a business you will not have to do high cost withdrawals. When it comes down to it, long-term investments pay better than short-term ones.  If nothing else, there's less administration and less financial risk for the provider.  That's why 2, 3 or 5 year savings accounts pay better than instant access ones. Higher-risk investments pay more interest (or dividends) than low-risk ones.  They have to, or nobody would invest in them. So by locking yourself out of any long term and/or risky investments, you're stuck with a choice of low-interest short term ones. There are plenty of investment funds that you can sell at short notice if you want to.  But they are volatile, and if you cash out at the wrong time, you can get back less than you invested.  The way you lower risk is either to invest in a fund that covers a broad range of investments, or invest in several different funds. "For me, the emergency fund is meant to cover unexpected, but necessary expenses that I didn't budget for.  The emergency fund allows me to pay for these things without going into debt. Let's say that my car breaks down, and I don't have any money in my budget for fixing it.  I really need to get my car fixed, so I spend the money from my emergency fund. However, cars break down periodically.  If I was doing a better job with my budget, I would allocate some money each month into a ""car repair/maintenance"" category. (In fact, I actually do this.)  With my budgeting software, I can look at how much I've spent on car repairs over the last year, and budget a monthly amount for car repair expenses.  Even if I do this, I might end up short if I am unlucky.  Emergency fund to the rescue! If I'm budgeting correctly, I don't pay any regular bills out of this fund, as those are expected expenses.  Car insurance, life insurance, and property tax are all bills that come on a regular basis, and I set aside money for each of these each month so that when the bill comes, I have the money ready to go. The recommended size of an emergency fund is usually listed as ""3 to 6 months of expenses.""  However, that is just a rough guideline.  As you get better with your budget, you might find that you have a lower probability of needing it, and you can let your emergency fund fall to the lower end of the guideline range.  The size of my own emergency fund is on the lower end of this scale. And if I have a true crisis (i.e. extended unemployment, severe family medical event), I can ""rob"" one of my other savings funds, such as my car replacement fund, vacation fund, etc. Don't be afraid to spend your emergency fund money if you need it.  If you have an unexpected, necessary expense that you have not budgeted for, use the emergency fund money.  However, your goal should be to get to the point where you never have to use it, because you have adequately accounted for all of the expenses that you can reasonably expect to have in the future." I am understanding the OP to mean that this is for an emergency fund savings account meant to cover 3 to 6 months of living expenses, not a 3-6 month investment horizon. Assuming this is the case, I would recommend keeping these funds in a Money Market account and not in an investment-grade bond fund for three reasons: "The purpose of the emergency fund is to enable you to pay for unplanned necessary expenses without going into debt.  You know that cars don't last forever and eventually need to be replaced. Ideally, you would have a ""car replacement fund"" which you contribute to a little every month. (Essentially, it is a car payment to yourself.)  Then when it comes time to get a replacement car, you have money set aside for this purpose and know exactly how much you can spend.  However, in your case it seems that you don't have enough money in your car replacement fund for the car that you want.  There are a few different causes that might have led to this situation: Due to unforeseen circumstances, you need a replacement car before you thought you would need it.  You find that your planning was not quite right, and you weren't saving as much as you need.  You are trying to buy a more expensive car than you need.  If a replacement car is a necessity, two of these are emergencies, one is not.  If you don't have enough cash set aside for a car, it is certainly better to spend your emergency fund and pay cash than to borrow money to buy the car. Only you can decide if the car you are looking at is appropriate for you, or if you should be looking at a less expensive car. After you purchase the car, build your emergency fund back up first, then start saving for your next car." Why can't you have both? If you do have both credit and an emergency fund, and an emergency occurs, you can draw from the line of credit first. Having debt + cash is a much more stable situation than having neither, because then you have the option to use the cash to pay off the debt, or use the cash to pay other expenses. If you just have cash, when you spend it it's gone and there's no guarantee anyone is going to lend you any money at that point. Before starting with investing, you should make sure you are saving enough.  Living in a welfare country (France) does not exempt you from potentially needing to save large amounts of money. You state that you do not need much of an emergency day fund, but this is not true.  Being dismissed unjustly from your job is not the only way to become unemployed and not all roads lead to unemployment pay.  Being fired for cause or leaving your job voluntarily are two work related causes that will leave you without an income source.  Unexpected major expenses are another reason you might need to dip into your emergency fund. If your emergency fund is in order, the next thing to investigate is your pension and saving for retirement.  In a country with a strong pension system, you need to check how comfortable you are with its sustainability (Greece anyone?) and also whether it will adequately meet your needs.  If not, there are no 401ks or IRAs in France, but there is a relatively new personal supplementary pension plan (PERP) that you might investigate contributing to. If you're comfortable with your emergency fund and your retirement savings, then preparing for buying a house is likely your next savings goal.  A quick search shows that to get a mortgage to buy a house in France, banks will commonly require a downpayment of 20% plus various closing costs.  See for example here.  This is 40,000+ euro for a 200k euro house, which will take you several years at the rate of 500 euro / month.  France has special plans (Plan d’Epargne Logement) with tax-exempt interest for saving up for a house that you might want to investigate. In your other question, you also ask about buying a cheap car.  As you get older and possibly start a family, having a car will likely become more of a necessity.  This is another goal you can save for rather than having to take a loan out when you buy one. "What you're describing makes sense. I'd probably call the non-liquid portion something besides my ""emergency fund"", but that's semantics mostly. If you have 3 months of ""very liquid"" cash in this emergency fund and you're comfortable that this amount is good for your situation, then I don't see why you can't have additional savings in more or less liquid vehicles. Whatever you set up, you'll want to think about how to tap it when you need it. You might have a CD ladder with one maturing every three months. That would give you access to these funds after your liquid funds dry up. (Or for a small/short term emergency, you'll be able to replenish the liquid fund with the next-maturing CD.) Or set up a T Bill ladder with the same structure. This might provide you with a tax advantage." "It's a spin on the phrase ""making your money work for you"". before sending your money off to do the heavy lifting, you'll want to   have an emergency savings account of about six months of living   expenses stored in cash. Basically, he is saying before you start to invest make sure you have sufficient emergency savings." 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. The biggest problem is what happens when you make a withdrawal if an emergency occurs. If the money was a contribution from a past year, you will not be able to put those funds back into the fund until a later date. Assume the following scenario: The limits regarding maximum annual contribution and windows when you can contribute make this an inefficient way to operate the emergency fund/retirement fund.  Retirement and emergency funds are both important. Don't co-mingle them, it leads to double counting the money when you guesstimate where you are regarding your financial goals. This is a somewhat subjective question, but if you are following a particular personal finance methodology, just do whatever they recommend. For example, I believe that Dave Ramsey's program calls for the emergency fund to be in a different account. 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.