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An emergency fund exists to provide you the financial peace of mind to sleep well at night. It’s there when unexpected events arise (or even exciting opportunities), but on the flip side, some in the financial world also question if that money might be better utilized in an investment vehicle.READ THE ARTICLE
In favor of investing: Emergency funds often sit in your savings account, where they earn an interest of about 0.5 percent per year. And while this money is highly liquid, in an economy of high inflation, it will inevitably yield worse returns than investing. Additionally, the liquidity of investments has improved over the years, and while that money cannot be simply pulled from an ATM, many vehicles allow asset withdrawal within 48-72 hours.
Protecting your “safe number”: The greatest issue with investing your emergency fund comes down to risk. If you’re willing to part with money in your emergency fund and know you will still sleep at night, that money doesn’t belong there. On the other hand, whatever number you have in your head as your set amount for financial peace of mind does belong in your emergency fund, and putting that at risk means purposefully placing yourself in a stressful situation.
Consider this: Do you know when your next emergency will hit? Of course not. But when you know you have cash readily available for anything life brings, that is often worth more than any greater investment return. Above all, your emergency fund serves a dual purpose: Safety AND security. Or, strategic AND psychological.