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KEY TAKEAWAYS
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Investing your entire emergency fund carries real risk, experts say.
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An emergency fund is important; it helps consumers pay for medical or repair emergencies without going into debt.
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Keeping your emergency fund in a savings account provides security and is especially important for older consumers and those facing higher potential emergency costs.
Let’s say you’ve built a solid emergency fund. You’ve done the hard part, so now comes the decision: leave it alone or take a risk with it?
Emergency funds are essential for many. Without them, many Americans turn to credit cards or tap their retirement savings to pay bills after a sudden layoff, or for a medical emergency or a costly repair.
You can grow your emergency fund by investing in the stock market, bonds, or funds, but those investments could lose value. So is it worth it to invest it all and rely on credit cards if anything goes wrong?
How Much Should You Have Saved for an Emergency?
Cary Carbonaro, a certified financial planner and managing advisor at Ashton Thomas Private Wealth, said she suggests most clients build an emergency fund that can replace six months of income.
Some people don’t need that much. For example, a household with two people working stable jobs can get away with an emergency fund of three months’ worth of income, Carbonaro said. Others may need more. Self-employed clients with only one customer should aim to save a year’s worth of income, since they’re more exposed if that customer leaves.
Other factors in how much to set aside include the age of your home or car. (The older they get, the more likely they are to need repairs.) How much to save also depends on your age and whether you’re near retirement, said Aaron Ulrich, a fiduciary and owner of Integra Financial Planning.
“Most [of my clients] are in their 60s and 70s,” Ulrich said. “For that cohort, I’m absolutely going to say to have the cash set aside.”
At that point, he said, they don’t have to worry as much about whether they’re getting a certain amount of interest or not.
Why This Matters
After several years of high inflation, the cost of emergency expenses—car or home repairs, health emergencies—has risen. Building a cushion that can absorb surprise costs matters more than ever.
Should I Keep My Emergency Fund As Is?
If one of Carbonaro’s clients had a six-month emergency fund and wanted to invest it all, she said she would absolutely advise against it. She tells them to imagine it’s 9/11 or the financial crisis of 2008, when the market dropped significantly.