How risky is it to keep my emergency fund in stocks?
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. Keeping your “big emergency” fund in stocks if you have 12 months income saved is OK.   However you should keep your “small emergency” fund in cash.   (However I find that even my stock broker accounts have some cash in them, as I like to let the dividends build up enough to make the dealing charges worthwhile.  You don’t wish to be forced to sell at a bad time due to your boiler needing replacing or your car breaking down.     However if you lost your job in the same week that your boiler broke down and your car needed replacing then being forced to sell stocks at a bad time is not much of an issue. Also if you are saving say 1/3 of your income each month and you have a credit card with large unused credit limit that is paid of each month, then most “small emergency” that are under 2/3 of your monthly income can be covered on the credit card with little or no interest charges. One option is to check you bank balance on the day after you are paid, and if it is more than 2x your monthly income, then move some of it to long term savings, but only if you tend to spend a lot less then you earn most months. 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. I've read the answers and respect the thought behind them.  I'd like to focus on (a) the magnitude of the emergency, and (b) the saving rate of the people affected. 3-6 months is interesting. It's enough not just to fix the car, repair the A/C, etc, but more than enough to lose one's job and recover. (Let's avoid the debate of how long it take to find a job, no amount of 'emergency savings' can solve that.) If one is spending below their means, any unexpected expense that can paid off within, say 3 months, doesn't really need to tap emergency funds (EF). And, at some level of income and retirement savings, one can more easily run a much lower EF.  My own situation - I had 9mo worth of expenses saved as EF. We were living well beneath our means, and I was looking at the difference between our mortgage (6%+) vs bank interest (near 0%). I used the funds to pay down principal, refinanced to a lower rate, and at the same closing got a HELOC. The psychology of this is tough, it then appears that for simple expenses, I'd be borrowing from my HELOC. On the other hand, the choice was between a known cost, the $5K/year the money was costing by sitting there plus the lower rate by going to a non-jumbo loan at the time, vs the risk of using 3% money from the HELOC. In the end, the HELOC was never tapped for more than a small portion of its line, and I never regretted the decision. Ironically, it's the person who isn't saving much that need the EF most. If you are a saver, you need to judge how long it would take to replace the funds.  I offer the above not as a recommendation, but as devil's advocate to the other excellent advice here. All cash flows are a choice, $100 going here, can't go there. I'd slip in a warning that one should capture matching 401(k) contributions, if offered, before funding the EF. And pay down any high interest debt. After that, the decision of how liquid to be is a personal choice, what worked for my wife and me may not be for everyone. "A major danger of keeping ""emergency"" funds in the form of stocks is that many of the scenarios where one would need quick access to the money will also momentarily depress the stock market.  Someone whose emergency funds were in some other form could avoid selling stocks during a momentary downturn, but someone who has no other emergency funds would have no choice but to sell during the downturn (thus losing money as well as making the downturn more significant for everyone else)." "This is basically the short-term/long-term savings question in another form: savings that you hope are long-term but which may turn short-term very suddenly. You can never completely eliminate the risk of being forced to draw on long term savings during a period when the market is doing Something Unpleasant that would force you to take a loss (or right before it does Something Pleasant that you'd like to be fully invested during). You can only pick the degree of risk that you're willing to accept, balancing that hazard of forced sales against the lower-but-more-certain returns you'd get from a money market or equivalent. I'm considered a moderately aggressive investor -- which doesn't mean I'm pushing the boundaries on what I'm buying (not by a long shot!), but which does mean I'm willing to keep more of my money in the market and I'm more likely to hold or buy into a dip than to sell off to try to minimize losses. That level of risk-tolerance also means I'm willing to maintain a ready-cash pool which is sufficient to handle expected emergencies (order of $10K), and not become overly paranoid about lost opportunity value if it turns out that I need to pull a few thou out of the investments. I've got decent health insurance, which helps reduce that risk. I'm also not particularly paranoid about the money. On my current track, I should be able to maintain my current lifestyle ""forever"" without ever touching the principal, as long as inflation and returns remain vaguely reasonable. Having to hit the account for a larger emergency at an Inconvenient Time wouldn't be likely to hurt me too much -- delaying retirement for a year or two, perhaps. It's just money. Emergencies are one of the things it's for. I try not to be stupid about it, but I also try not to stress about it more than I must." From mid 2007 to early 2009 the DJI went down about 50 %. This market setback won't happen on a single day or even a few weeks.  Emergency funds should be in cash only. Markets could be closed for an unknown period of time.  Markets where closed September 11 until September 17 in 2001. I do this very thing, but with asset allocation and risk parity in mind. I disagree with the cash or bust answers above, but many of the aforementioned facts are valuable and I don't mean to undermine them in anyway. That said, let's look at two examples: Option 1: All-in For the sake of argument let's say you had $100k invested in the SPY (S&P 500 ETF) in early 2007, and you kept it there until today. Your lowest balance would have been about $51k, and at this point the possibility of you losing your job was probably at a peak. Today you would be left with $170k assuming no withdrawal. Option 2: Risk Parity BUT if you balanced your investments with a risk parity approach, using negatively correlated asset classes you avoid this dilemma. If you had invested 50% in XLP (Consumer Staples Sector ETF) and 50% in TLT ( Long Term Treasury ETF) your investments low point would have been $88k, and your lowest annual return would be +0.69%. Today you would be left with $214k assuming no withdrawals.  I chose option #2 and it hasn't failed me yet, even in 2016 so far the results are steady and reliably given the reward. My general opinion is simple: when you have money always grow it. Just be sure to cover your ass and prepare for rain. Backtesting for this was done at portfoliovisualizer.com, the one caveat to this approach is that inflation and a lack of international exposure are a risk here.
"Okay. Savings-in-a-nutshell. So, take at least year's worth of rent - $30k or so, maybe more for additional expenses. That's your core emergency fund for when you lose your job or total a few cars or something. Keep it in a good savings account, maybe a CD ladder - but the point is it's liquid, and you can get it when you need it in case of emergency. Replenish it immediately after using it. You may lose a little cash to inflation, but you need liquidity to protect you from risk. It is worth it. The rest is long-term savings, probably for retirement, or possibly for a down payment on a home. A blended set of stocks and bonds is appropriate, with stocks storing most of it. If saving for retirement, you may want to put the stocks in a tax-deferred account (if only for the reduced paperwork! egads, stocks generate so much!). Having some money (especially bonds) in something like a Roth IRA or a non-tax-advantaged account is also useful as a backup emergency fund, because you can withdraw it without penalties. Take the money out of stocks gradually when you are approaching the time when you use the money. If it's closer than five years, don't use stocks; your money should be mostly-bonds when you're about to use it. (And not 30-year bonds or anything like that either. Those are sensitive to interest rates in the short term. You should have bonds that mature approximately the same time you're going to use them. Keep an eye on that if you're using bond funds, which continually roll over.) That's basically how any savings goal should work. Retirement is a little special because it's sort of like 20 years' worth of savings goals (so you don't want all your savings in bonds at the beginning), and because you can get fancy tax-deferred accounts, but otherwise it's about the same thing. College savings? Likewise. There are tools available to help you with this. An asset allocation calculator can be found from a variety of sources, including most investment firms. You can use a target-date fund for something this if you'd like automation. There are also a couple things like, say, ""Vanguard LifeStrategy funds"" (from Vanguard) which target other savings goals. You may be able to understand the way these sorts of instruments function more easily than you could other investments. You could do a decent job for yourself by just opening up an account at Vanguard, using their online tool, and pouring your money into the stuff they recommend." I'd imagine that it's a small portion of the population that can have much of both. If one is saving a decent amount for retirement, say 10-15%, they aren't likely to have much else, aside from the house if included. For example, when I look at my 'pie chart' I get Retirement 72%, House 22%, everything else 6%.  Specific to your question, emergency funds should be just that, accessible for urgent matters, other short term needs, such as car fund, big TV fund, vacation, etc, also in non-risky cash (i.e. money funds CDs, etc) and the rest invested long term. The short need money isn't part of the long term asset allocation, to be specific. I mean  a checkings/savings combo is fiscally responsible if you're putting a 3-6 month emergency fund in there. Hell, I'd argue that you'd be insanely bad with money not to keep an emergency fund if you got the cash to spare.  401(k),IRAs, and stocks are great investment vehicles, but having a portion of your funds be liquid is important. I like the way you framed this question.  There is no single right answer for what to do with your savings, but there are some choices that are wrong in the sense that they are dominated by other choices you could make.  Of the choices you listed, there are two that fall into that category.  The ones that seem like a bad idea to me are: Putting it into your Roth 401(k).  You can't do this directly anyhow, but you could do it indirectly by increasing your contributions and using the growth fund to cover the hole in your budget, but that's a lot of work for a relatively small gain.  You would essentially be exchanging one long-term investment for another long-term investment.  You would pay capital gains taxes on the investment when you sell it today, in order to not pay taxes on its earnings when you eventually withdraw it.  There is some benefit there, but it's a long way off, not that large, and probably not worth the effort.  Things that might change your mind:  If your 401(k) was a traditional 401(k) (paying tax at capital gains rate today to get a deduction at your normal income rate is likely to be a win).  You're not contributing enough to get the full company match (always try to get that match if you can). Putting it into your emergency fund.  Once again, you are likely to pay capital gains tax if you do this, and you will be putting it into an investment that is likely to get a lower return than your current one.  It isn't really necessary to incur these costs, since if you encounter an emergency that you can't cover with your existing emergency fund, you could always liquidate the growth fund then, when you know you need it.  Now, a growth fund is going to be more volatile than what you would normally want for an emergency fund, but the risk isn't that bad, if you think about it.  Say your emergency comes up and you find that the growth fund is down 20% (which would be a pretty horrible run).  That's $600 less that you have to deal with the situation.  Keep in mind that you already have $2000 (and building) in your current emergency fund.  Is that $600 going to make the difference between meeting the need and not?  It's not likely.  Better to leave the investment where it is and keep building your emergency fund week by week.  Things that might change your mind: Your level of risk aversion (if having that money in a more risky investment is keeping you up at night, move it).  You face significant job uncertainty (if you have reason to think your job is at risk, it might be a good idea to top off that emergency fund sooner rather than later.) Your other two choices both seem like solid options under the right circumstances.  If it were me, I'd leave the investment in place rather than use it to pay off the student loan.  The investment is likely (though of course not guaranteed) to earn more than the interest rate even on the highest-rate loan, especially when you consider that the interest on the student loan is probably tax deductible.  Moreover, the size of the investment isn't enough to fully repay the loan, so putting it toward the loan won't even improve your cash flow for some time to come.  However, there is always a chance that the investment will perform poorly and some people prefer the guaranteed return from paying off the loan.  It depends on your personal risk tolerance.  The one thing I would recommend is to think of putting the money toward the loan not as a debt repayment, but as a fixed-income investment with a yield equal to your loan's interest rate.  If you would still consider buying it then, then go ahead.  If not, then stick with what you've got.  In my experience people get way too emotional about debt; try to take that emotion out of your decision making if you can. There's some risk, but it's quite small: The only catastrophic case I can think of is if the brokerage firm defrauded you about purchasing the assets in the first place; e.g., when you ostensibly put money into a mutual fund, they just pocketed it and displayed a fictitious purchase on their web site.  In that case, you'd have no real asset to legally recover.  I think the more realistic risks you should be concerned with are: The only major brokerage firm that I'm aware of that accepts liability for theft is Charles Schwab: http://www.schwab.com/public/schwab/nn/legal_compliance/schwabsafe/security_guarantee.html If you're going to diversify for security reasons, be sure to use different passwords, email addresses, and secret question answers on the two accounts. "As long as you are disciplined about it, you can certainly have your emergency fund and other savings funds in one account.  Multiple accounts may incur added costs, since you may not have the minimum balances to avoid the fees.  Some banks provide tools or account features to help track separate ""buckets"" of funds within one account. One important principle for an emergency fund is liquidity.  Those funds should be easily accessible, ideally without withdrawal penalties or transaction costs.  For this reason, certificates of deposit (CD) or money market funds should be avoided for this purpose. Another important principle, for any savings fund, is capital preservation/safety.  That money should not be held in risky assets.  Depending on the purpose of the fund, you may consider other options beyond just a savings account.  For example, you may consider placing funds for a house in CD(s) early on, before you are actually looking for the house.  As you get closer to having enough for a down payment, you would shift that money into a savings account.  One drawback of such an approach is the extra management that this requires on your part. A spreadsheet is a simple way to track these funds, though that requires more manual management and discipline to do that tracking.  It also requires some knowledge of spreadsheets, but it provides you with flexibility so you can create a process that works well for you.  Any accounting software should allow you to do this in some fashion with (hopefully) less effort than maintaining a spreadsheet, though you may have to do things in a certain way that may be awkward in some cases. Those are the basic principles that come to mind.  I am sure others can provide more specific suggestions, like banks which allow you track buckets of funds or accounting software that can help you track the funds." "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." The issue is how likely you will have zero income for six months, and what are your monthly expenses. If you know the maximum medical bill you face that may allow you to save a smaller amount. But you still have to protect for that loss of income. The interuption could be because of job loss, medical emergency, or other family crisis.  If I told you that  the chances you would face a crisis dropped by 50%, would you decide that the need for an emergency fund went away? Or would you still create a fund? I think the need still exists just to avoid the downside if you aren't prepared.