Should I Invest My Emergency Fund?

Quick Answer

It isn’t wise to invest your emergency fund. If you put this money in the stock market or other high-risk investment, you’ll be exposing yourself to potential losses and it might also be difficult to access your money.

A woman researching investing her emergency fund using her laptop.

A strong emergency fund is a key part of financial wellness. The rule of thumb is to set aside three to six months' worth of expenses in a liquid account you can access easily if needed. If you put this money in the stock market or other high-risk investments, you'll be exposing yourself to potential losses. It might also be difficult to access your money. Here's why you shouldn't invest your emergency fund, along with the best places to keep it.

Why Do You Need an Emergency Fund?

An emergency fund is exactly what the name implies: It's a pool of cash that's designed to see you through the unexpected, whether it's a minor financial inconvenience or a major expense. That can include:

Without a healthy emergency fund, you may have limited financial options. That could leave you relying on credit cards to get over the hump. As of the second quarter of 2023, the average credit card annual percentage rate (APR) was over 22%, according to the Federal Reserve. With an emergency fund, you're essentially borrowing money from yourself, interest-free. You can then replenish your emergency savings over time.

If you have nothing in savings and run into a financial emergency, you might be forced to dip into your retirement accounts. With tax-deferred accounts like 401(k)s and traditional IRAs, that will likely trigger a 10% early withdrawal penalty—plus a tax bill. You're also depleting your nest egg and cutting yourself off from potential investment gains.

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Should I Invest My Emergency Fund?

No, it's best not to invest your emergency fund, and here's why.

You Want Easy Access to Your Emergency Fund

An unexpected financial situation could majorly rock your budget. An emergency fund provides peace of mind and can help you to get to the other side. You'll want to keep this money within reach. That's what makes investing your emergency fund so risky. While it may be tempting to put this money into a retirement fund, these accounts are known for being difficult to access. Depending on your plan, it could take several weeks to receive your money. And again, there could be additional financial penalties.

Even if you put your emergency fund in a low-risk investment like a certificate of deposit (CD), your funds will be tied up in the account until the term ends. Withdrawing money before then typically triggers an early withdrawal fee.

Investment Losses Are Always Possible

Let's say you choose to invest your emergency fund in other ways, such as:

All of these investments pose significant financial risk. Returns are never guaranteed, and investment losses are always possible. If things don't pan out the way you planned, you could lose a large portion of your emergency savings—and it could happen relatively quickly. The goal is to safeguard your emergency fund.

Where Should I Keep My Emergency Fund?

The following accounts provide liquidity and the opportunity to earn interest on your emergency fund.

  • High-yield savings account: This type of account is known for offering competitive interest rates. High-yield savings accounts can have interest yields much higher than those you'll get from a traditional savings account. That can help grow your emergency fund without any effort on your part.
  • Money market account: This is an interest-yielding account that tends to offer higher-than-average annual percentage yields (APYs). What's unique about a money market account is that most come with a debit card or checkbook that makes it easier to access your money. Just be sure not to dip into your savings for non-emergencies.
  • CD: While a CD isn't a great place to keep your entire emergency fund, you might consider using it for a portion of your savings. With a CD, you can lock in a strong rate and allow your money to grow until the account matures. The trade-off is that you're giving up access to your funds. (Again, pulling money out of a CD before the term ends will usually result in a fee.)

The Bottom Line

An emergency fund is the centerpiece of a healthy financial plan. You'll want to keep it in a liquid account that allows you to withdraw funds quickly if needed. Meanwhile, it's possible to earn interest on your savings. Investing your emergency fund isn't advised because you run the risk of losing money, and you could also sacrifice liquidity.

One of the biggest benefits of an emergency fund is that it can help you avoid taking on debt to get through a financial surprise. Free credit monitoring with Experian is another way to keep your credit going strong.