Emergency Funds – Savings or not?

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We’ve been an advocate of the Emergency Fund (aka “Oh Crap Fund”) for years.  It has definitely helped us out on a few occasions.  And it’s not just the immediate need that it satisfies.  Yes, it’s nice to know that if the hot water heater bursts, you don’t have to pull out the MasterCard to pay for it.  It’s also the peace of mind behind that. 

I came across this post from Betterment.com today which raises the question on the best approach on where to put your Emergency Funds.  We initially signed up for ING Direct (before it became part of Capital One) because they had higher interest rates than other sources. Now that they too have fallen down to the anemic rates of less than 1%, that is one bonus that goes away.

The article outlines the idea of putting the funds into a moderate risk mutual fund portfolio.  This is definitely counter to most advice you hear, but there are some valid points.

  1. Losing value of your money due to the effect of inflation.
  2. Losing ‘opportunity cost’ of the investments.

As I think about the pros and cons of this advice, I can definitely see their advantages. However, the main idea behind the ‘Emergency Fund’ is that this money is not an investment fund.  It’s ‘extra money’ to be used in case of an Emergency (hence the name). As we all painfully saw in 2007-2008, the financial markets took a huge hit.  Many of the sadder stories you heard about where the nest eggs of Retirees who lost 40% or more of their life savings.

This too would be a risk in moving such funds to a Mutual Fund.  Looking at the articles suggested Emergency Fund balance, we’re a little below their recommendation.  So we’ll probably make some adjustments to our savings plans.

While Betterment is a paid service (one I’m not affiliated with), their desire is to get you to open an investment account.  However, if you wanted to, you could build your own investment approach.  We’ll consider their pros and cons as we monitor our Financial Plan.

How about you?  Is your Emergency Fund up to what you need?  

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