Your emergency fund should not be in the stock market! …and here is why.

This blog post was adapted from the 88th edition of our newsletter. To sign up for the distribution list and never miss an issue, click here. 

Hello, everyone!

 

Today’s topic is one that many people have asked me over the years — “is it okay to put emergency money in the stock market?”. The short answer is absolutely not. The long answer is below. 
As the name indicates, the money you allocate to an emergency fund is to be used for emergencies. As we all know, emergencies never give us a “warning” or a “heads up” in regards to when they are coming, they simply show up unannounced and uninvited.
 
For this reason, the money you may need for those “unexpected life occurrences” must be kept as liquid as possible. By liquid, I mean the money should be easily accessible in its entirety when it is needed.
Some examples of liquid accounts include:

(1) High yielding savings account (a savings account with a high-interest rate)
(2) Money market account
(3) A CD (certificate of deposit)

 

The point is having those funds at a secured placed where there are easily accessible and where you’ll be able to take the money out without any issues or complications.

 

“Money from an emergency fund or any money you may need in the short term (within the next six months or even the next few years) should not be in the stock market.”

The reason why the stock market can provide us with amazing returns over time is because it also involves risk.

There are no guarantees in terms of how much money you will make (or how much you can lose) within a certain time period.

You don’t want to find yourself in a position where you need the money as soon as possible and have to cash out of your stocks at a loss. That is not the way to invest and much less build a profitable portfolio over time.

Although it is true that money in a bank doesn’t grow at all (returns are usually pennies on the dollar) The advantage of having that emergency money in a bank account is that at least you’ll be rest assured that 100% of your money will be there when you need it.

In my opinion, banks are only good for one thing and that is to “hold” your money and keep it safe. So, use it for that and then try to allocate the rest of your funds (that you won’t need for several years) in high-quality investments.

 
In conclusion, keep your saving and investing money separate. You will have peace of mind and will be able to let your investing money grow and compound over time as opposed to being worried that you may need it soon.
Questions? Comments? Would like to discuss this topic further? Simply comment below or email me: hello@girlsonthemoney.com
 
Cheers to profits!
******
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