Here’s why you shouldn’t invest your emergency fund

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Editor’s Note: The APYs listed in this article are current at the time of publication. They can fluctuate (up or down) based on changes in the Fed’s rate. Select will be updated as changes are made public.

Emergency savings can come in very handy when certain life disruptions arise. It could be a leaky roof, an unexpected medical bill, a job loss, or even emergency surgery for a beloved pet. Experts generally recommend having three to six months of savings for a fully funded emergency account. So unless you only have $ 10,000 to spare, building up a substantial emergency fund may take some time.

But with inflation devaluing your money over time, it can be easy to feel like you’re “wasting” the growth potential of your emergency money by just keeping it in a savings account. But before you start researching investing apps, know that there are several reasons why you should rethink your emergency fund investing.

You could potentially lose the money you invest

In general, it is not a good idea to invest your emergency fund. Unexpected expenses, of course, are completely unpredictable and when you invest your emergency fund you run the risk of eventually losing your initial investment if the value of your assets drops below what you bought them for. Put the money in a However, a savings account would keep your initial deposit when you really need it.

So suppose you deposit $ 5,000 into a savings account; you will still have $ 5,000 in the account a few months later. And if you put the $ 5,000 in a brokerage account and invest in stocks or index funds, of course it could be worth $ 6,000 in a few months if the value of your investments increases. But it could also be worth $ 4,000, or even less, if your investments go down in value. This means you could end up with less money to cover a big surprise expense.

“We need to stop ourselves from playing the opportunity cost game with our emergency funds,” said Brian O’Leary, wealth advisor and senior analyst at ALINE Wealth. “Don’t say: ‘if I had invested the money, I would have increased by X%’. “

Ultimately, you should aim to preserve the money in your emergency fund. This way, you won’t have to worry about what happens with your emergency money in a stressful market environment. Imagine the market collapsing, you lose your job due to the ensuing bad economy and then realize that your emergency fund is worth half of what it was before the stock market crash.

“By the time an accident happens, it’s too late to put on your seatbelt,” O’Leary said. “So if you’re not wearing your seat belt, you need other measures to keep yourself safe. In other words, if your investment goes down, you need other ways to get capital. could mean going into debt to cover your expenses, and that can end up being very expensive. “

You will owe taxes when you need to make a withdrawal

Keep in mind that when you invest money in a taxable brokerage account, you will be responsible for paying taxes when you sell stocks and make your earnings. The tax rate you pay will depend on when you bought the shares and when you sold them.

Profits from the sale of assets that you have held for a year or less are subject to short-term capital gains tax, which will generally be the same as your normal tax rate. On the other hand, if you sell assets that you have held for more than a year, you will pay a long-term capital gains tax with a rate of between 0% and 20%. As a general rule, it’s best to be taxed at the long-term capital gains rate because you usually owe less in taxes. But again, emergencies can’t be predicted, so having to sell your assets within a year of buying them means you’ll owe more in taxes.

Instead of investing your emergency fund, consider putting money into a high yield savings account. High yield savings accounts earn you interest each month just to keep your money in the account. This allows you to increase your balance a bit faster, even if you don’t make regular contributions. Marcus by Goldman Sachs High Yield Online Savings and Ally Online Savings both offer 0.5% APY. The APY usually depends on the interest rates set by the Federal Reserve, so it can change and even increase over time.

Interest rates offered by most high yield savings accounts have remained stable at 0.5% for the past 18 months due to the Federal Reserve’s interest rate cut in response to the pandemic of Covid-19. Even if the rate isn’t that high, it’s better than nothing, and you know the value of your money won’t fluctuate.

Marcus High Yield Online Savings by Goldman Sachs

Information about Marcus High Yield Online Savings by Goldman Sachs was independently collected by CNBC and was not reviewed or provided by the bank prior to publication. Goldman Sachs Bank USA is a member of the FDIC.

  • Annual percentage return (APY)

  • The minimum balance

    None to open; $ 1 to earn interest

  • Monthly fee

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

Ally Bank Online Savings Account

  • Annual percentage return (APY)

  • The minimum balance

  • Monthly fee

    No monthly maintenance fees

  • Maximum number of transactions

    Up to 6 free withdrawals or transfers per statement cycle * The withdrawal limit of 6 survey cycles is removed during the coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a checking account?

  • Offer an ATM card?

    Yes, if you have an Ally checking account

At the end of the line

While it may be tempting to invest your emergency fund to increase your balance even faster, it could be disastrous if your assets lose value when you need to make a withdrawal. And of course, there will be a tax consequence when selling assets and withdrawing from a taxable investment account.

But if you still don’t want to miss the opportunity to grow your emergency fund a little faster, put the money in a High yield savings account is a safer option. This will allow you to preserve your total balance regardless of market volatility, and you will earn interest just by keeping your money in the account.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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