- If you don’t have an adequate emergency fund, you may be forced to sell stocks at a loss to drum up cash.
- Since I have a larger emergency fund, I can invest more confidently and take on more risk in my portfolio.
- It’s important to ensure you have at least three to six months’ worth of bills in your emergency fund to protect yourself.
A recent SecureSave survey found that 67% of Americans don’t have enough emergency cash reserves to cover an unplanned $400 expense. If you’re in a similar boat, then it’s imperative that you do what you can to build up a more robust savings account balance.
In fact, a good rule of thumb is to sock away enough money in an emergency fund to cover three to six months’ worth of bills. The logic there is that if you were to lose your job, you’d have money to tide yourself over for a bit of time. Your emergency savings could also come in very handy in the event of an unplanned bill like a large home or car repair.
Now I happen to have a little more than a year’s worth of bills tucked away in my savings account. And some people might argue that that’s an excessive amount of cash to have in the bank.
Save: This credit card has one of the longest 0% intro APR periods around
More: Save while you pay off debt with one of these top-rated balance transfer credit cards
But I like having a larger emergency fund because it gives me peace of mind. And so it’s worth it to me to keep that extra cash in the bank, even if it means not getting to invest it and giving up what could potentially be a much higher return.
In fact, I feel that my larger emergency fund actually helps me be a better investor and make the most of the money I am putting to work. Here’s why.
It’s all about options and minimizing losses
Recently, a relative of mine had to sell some stocks in their brokerage account at a loss because they needed money and didn’t have it in savings. Because I have a larger emergency fund, that’s something I’ve never had to do.
When my air conditioning system gave out on me a while back and I had to come up with $7,000 on the spot, I didn’t have to sell off stocks to scrounge up the money. Instead, I took the money out of the bank. Had I not had that option, I might’ve been looking at losses in my portfolio.
Also, having more money in emergency savings gives me the flexibility to put my money into riskier assets. The way I see it, if I’m covered for unplanned bills, I won’t really ever be pressured to liquidate those more speculative assets at a moment’s notice. That means I can ride out periods when their value declines.
Your emergency fund should take priority
You may not want to keep a full year’s worth of bills in savings for emergency fund purposes. And for many people, a smaller emergency fund will absolutely suffice in providing great protection. But if you don’t yet have enough money in your emergency fund to cover three full months of living expenses, then your best bet is to take any incoming cash you get your hands on and put it in the bank rather than invest it.
Investing is a great way to grow your money into a larger sum. But it’s important to make sure your emergency fund is fully loaded before you start to invest.
These savings accounts are FDIC insured and could earn you 12x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.