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Life is unpredictable, and an emergency fund acts as your financial safety net. Whether it’s covering unexpected medical expenses or getting through a sudden job loss, an emergency fund gives you peace of mind and prevents you from relying on high-interest credit cards or loans during a crisis.

Experts generally recommend saving at least three to six months’ worth of living expenses for emergencies, which can add up to a sizable sum. With this much money sitting in an account, it’s natural to wonder: Should you invest your emergency fund to help it grow faster?

The answer is generally, no. Emergency funds should be readily available and liquid — meaning you can access them quickly without losing value. Riskier investments like stocks, mutual funds, or real estate, typically do not fit that profile. However, there are safe places where you can store your emergency fund while still earning a modest return.

Should You Invest Your Emergency Fund?

It can be tempting to put your emergency fund to work. After all, if you’ve saved $10,000 or more, why not grow it in the stock market or tuck it into your retirement account? On the surface, it feels like a smart financial move.

However, your emergency fund serves a very different purpose from your investment accounts. Investments are meant to build wealth over time, while an emergency fund exists to protect you in the short term. That means safety and accessibility may matter more than potential growth.

Think of it this way: If you put $10,000 into a savings account, you’ll have that $10,000 several months from now. If you put that $10,000 in a brokerage account and invest in stocks, it might grow to $12,000 in a few months, but it could just as easily drop to $8,000 (or possibly even less) right when you need it most.

On top of that, certain investment accounts come with restrictions, taxes, and/or penalties that make it harder — and more expensive — to access your money quickly.

This doesn’t mean your emergency fund has to sit in a checking account earning little to no interest. The key is to find a balance: a place where your money remains safe, liquid, and accessible, while earning at least some return.

Recommended: Emergency Fund Calculator

The Risks of Investing an Emergency Fund

While investing can build wealth in other areas of your financial plan, it can undermine the purpose of your emergency fund. Here are the biggest risks you face when putting those savings into investments.

It Might Take You Longer to Get Your Money

Emergencies, by definition, require quick action. If your car breaks down or a pipe in your home bursts, you’ll likely need funds immediately. Some investments, however, are not designed for instant access. Stocks and mutual funds, for example, must be sold before you can access cash, and it can take a couple of business days for the transaction to settle. The longer it takes to access your money, the less effective your emergency fund becomes.

You Could Risk Losing Money

The stock market can be volatile. If you need to access your emergency fund during a market downturn, you could be forced to sell your investments at a loss. Even relatively stable assets like bonds or certain mutual funds can lose value when interest rates rise or market conditions shift. This makes them unreliable for something as crucial as an emergency fund.

You could also face taxes and penalties. Withdrawals from taxable accounts may trigger capital gains taxes, and pulling money early from retirement accounts often comes with penalties. What’s supposed to be a cushion could quickly turn into a financial headache.

Considerations for Storing an Emergency Fund

Instead of chasing returns, you’re usually better off putting your emergency fund in an account that is safe, yet not stagnant. The best places to keep an emergency fund allow you to:

Access Your Funds Easily

The most important feature of an emergency fund is liquidity. You need to be able to access the money quickly, ideally within minutes or hours, not two to three business days, or more. This means avoiding accounts where you might face delay, fees, or penalties for withdrawals.

Earn Potentials Returns on Your Money

While safety comes first, that doesn’t mean your emergency fund has to sit idle. Traditional savings accounts often earn a relatively low interest rate, but newer options such as high-yield savings accounts and money market accounts generally offer much better returns without sacrificing accessibility.

Even if the interest rate seems small compared to investment returns, earning 3.00% to 4.50% APY (Annual Percentage Yield) on your emergency fund can help combat inflation and ensure your money grows slowly over time instead of losing purchasing power.

3 Options for Keeping an Emergency Fund

If you want your emergency fund to be both safe and productive, here are three common options worth considering.

High-Yield Savings Account

A high-yield savings account (HYSA) can be a good choice for an emergency fund. Many HYSAs are offered by online banks, which generally have lower overhead costs and can pass those savings on to customers through higher interest rates and fewer (or no) fees.

HYSAs generally pay interest rates far above traditional savings accounts — often several times the national average. In addition, funds are typically FDIC-insured and accessible anytime.

Money Market Account

A money market account (MMA) blends features of savings and checking accounts. They typically offer higher interest rates than standard savings accounts while providing some of the conveniences of a checking account, such as checks or a debit card. Just keep in mind that some MMAs require high minimum balances and may charge monthly fees if balance requirements aren’t met.

Certificates of Deposit

Certificates of Deposit (CDs) offer a guaranteed return without risking your money, and rates are typically higher than traditional savings accounts. The tradeoff is that your funds are locked up for a specific term (which can range from a few months to several years), and early withdrawals typically trigger a penalty. However, there are two ways to make CDs work for your emergency fund:

•   CD ladders: With this strategy, you spread your emergency fund across multiple CDs with staggered maturity dates (e.g., 3 months, 6 months, 12 months). This way, a portion of your funds becomes available regularly while still earning higher interest.

•   No-penalty CDs: Some banks offer CDs that allow you to withdraw funds early without penalties. These can be a good compromise between higher interest and accessibility. Just keep in mind that no-penalty CD rates tend to be lower than traditional CDs with similar term lengths.

While CDs generally shouldn’t hold your entire emergency fund, they can work for a portion of it if you want to maximize returns without significant risk.

The Takeaway

An emergency fund isn’t meant to be an investment but, rather, a safety net. Putting your emergency savings in volatile investments like stocks or real estate can leave you vulnerable just when you need money the most.

That said, you don’t have to leave your emergency fund in a traditional savings account that may earn lower rates. High-yield savings accounts, money market accounts, and certain CDs can offer the perfect balance of safety, accessibility, and growth.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is it wise to invest your emergency fund?

Generally, it’s not wise to invest your emergency fund in risky assets like stocks, mutual funds, or real estate. The purpose of this fund is immediate accessibility and preservation of capital, not growth. Investments can fluctuate, and if you need cash during a downturn, you might be forced to sell at a loss. A safer option is keeping your fund in a high-yield savings account or money market account, where it earns more modest interest but remains secure and easily accessible.

How much of my emergency fund should be liquid?

Ideally, your entire emergency fund should be liquid, or at least the majority of it. Emergencies often require immediate cash access, so keeping funds in a savings account, checking account, or money market account is generally best.

If you have a larger emergency fund — say, more than six months’ living expenses — you might keep a small portion in short-term certificates of deposit (CDs). However, it’s generally a good idea to keep at least three to six months of essential expenses fully liquid and easily accessible without penalties.

What should an emergency fund not be used for?

An emergency fund should not be used for planned expenses, vacations, shopping, or investments. It exists specifically for unexpected, urgent financial needs such as medical bills, car repairs, or a sudden job loss. Using it for non-emergencies undermines its purpose and can leave you vulnerable when a real crisis comes up.

More from the emergency fund series:

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Emergency Fund: What It Is and Why It’s Important

How Much Money Should Be in Your Emergency Fund?

How to Build an Emergency Fund

Emergency Fund Calculator

Where to Keep an Emergency Fund

When to Use Your Emergency Fund

>

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SOBNK-Q325-112

Self-directed 401(k) accounts aren’t as common as traditional 401(k) plans, but they can be of interest to DIY-minded investors.

Self-directed 401(k) plans — which may be employer-sponsored or available as a solo 401(k) for self-employed individuals — expand account holders’ investment choices, giving them more control over their own retirement plans. Instead of being limited to a packaged fund, an investor can choose specific stocks, bonds, mutual funds, and possibly even alternative investments, in which to invest their retirement money.

What Is a Self-Directed 401(k) Account?

The key promise of self-directed 401(k) plans is control. They allow retirement plan savers to basically act as managers for their own retirement funds.

A self-directed 401(k) plan offers expanded investment choices, including stocks, bonds, funds, and cash, and potentially alternative investments like real estate investment trusts (REITs) and commodities, if the plan allows for these alternative investments.

For a plan holder who believes they have the investment know-how to leverage better returns than a managed 401(k) or target-date fund, a self-directed 401(k) may be an appealing choice.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Who Is Eligible for a Self-Directed 401(k)?

As long as your employer offers a self-directed 401(k), and you have earned taxable income for the current calendar year, you can enroll.

Alternatively, if you are self-employed and own and run a small business alone, with no employees (aside from a spouse), and your business earns an income, you are also eligible. You can search for a financial institution that offers self-directed plans, which might include a solo 401(k).

This is one of the self-employed retirement options you may want to consider.

How to Set Up a Self-Directed 401(k)

Setting up a self-directed 401(k) plan can be fairly straightforward. Once a 401(k) or solo 401(k) account is established, individuals can fund it in the following ways:

•   Plan transfer. Funds can be shifted from previous or existing 401(k) plans and individual retirement accounts (IRAs). However, Roth IRAs can’t be transferred.

•   Profit sharing. An employee receiving funds from a company through profit sharing can use that money to open a self-directed 401(k) plan — up to 25% of the profit share amount.

•   Direct plan contributions. Any income related to employment can be contributed to a self-directed 401(k) plan.

Recommended: How to Manage Your 401(k)

Pros and Cons of Self-Directed 401(k)s

Like most investment vehicles, self-managed 401(k) plans have their upsides and downsides.

Pros of Self-Directed 401(k) Plans

These attributes are some of the self-directed 401(k) plan advantages:

•   More options. Self-directed 401(k) plans allow retirement savers to gain more control, flexibility, and expanded investment choices compared to traditional 401(k) plans.

•   Tax deferral. Like regular 401(k) plans, self-directed 401(k) plan contributions and asset gains are tax-deferred.

•   Employee matching. Self-directed 401(k) plans allow for employer matching contributions, potentially paving the way for more robust retirement plan growth.

•   Plan diversity. Account holders can invest in assets not typically offered to 401(k) plan investors. This potentially includes alternative investments like REITs, precious metals like gold, silver and platinum, and private companies, depending on what the 401(k) plan allows, thus lending additional potential for diversity to self-directed 401(k) plans.

Cons of Self-Directed 401(k) Plans

These caveats and concerns are most often associated with self-directed 401(k) plans:

•   Higher-risk investments. Historically, alternative investments come with more volatility — and hence more risk — than stocks and bonds.

•   Diversification is on the investor. You’ll need to choose among stocks, bonds and funds to augment your self-directed 401(k) plan asset allocation.

•   Higher fees. Typically, self-directed employer retirement plans cost employees more to manage, especially if an investor makes frequent trades.

•   Larger time investment. Since self-directed 401(k) plans offer access to more investment platforms, savers will likely need to spend more time doing their due diligence to research, select, and manage their plan options, especially in the area of risk assessment.

How Much Money Can be Put in a Self-Directed IRA?

The amount an investor can contribute to a self-directed IRA is the same as the amount that can be contributed to a traditional IRA account. The annual contribution limit is $7,000 for tax year 2025. Those 50 and older can contribute an additional $1,000 to a self-directed IRA, for a total of $8,000 per year.

For a self-directed 401(k), the amount that can be contributed is the same as the contribution limits for a traditional 401(k). For 2025, the limit is $23,500. Those 50 and older can make an additional catch-up contribution of up to $7,500, for a total of up to $31,000. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500), for a total of $34,750.

Recommended: Guide to Self-Directed IRAs

Common Self-Directed 401(k) Investments

The ability to choose from an expanded list of investment categories may be an intriguing benefit for a 401(k) plan holder who believes they have the investment know-how to leverage better returns from those investments.

However, the key is understanding what potential opportunities and what risks certain self-directed investment vehicles bring to the table. Here’s a closer look at two alternative investments that may be offered by some self-directed 401(k) plans.

Real Estate Investment Trusts (REITs)

Through a REIT, individuals with a self-directed 401(k) plan can potentially invest in residential or commercial properties with the goal of income generation — without having to actually buy property. A REIT is a company that owns and maintains different types of properties; investors can buy shares in the REIT.

Examples of properties that might be in a REIT include:

•   Apartment buildings

•   Hotels

•   Office buildings

•   Single-family homes

•   Shopping malls or other retail centers

•   Storage facilities and warehouses

•   Health care facilities

REITs can be publicly traded or private. To invest in a publicly-traded REIT with a self-directed 401(k) plan, an investor would use their 401(k) funds to purchase shares in the REIT. The REIT would then pay out dividends on the income collected through rent, mortgages, and so on. REITs are required to distribute at least 90% of its taxable income to shareholders each year as dividends.

An investor might also choose to invest in REIT mutual funds or REIT exchange-traded funds (ETFs). These vehicles can provide ways to diversify holdings.

However, REITs come with risks. For example, they can be affected by fluctuations in the real estate market, such as falling property values or reduced occupancy demand. In addition, when interest rates rise, REIT prices may drop, which could lower the value of the investment. Individuals with a self-directed 401(k) should fully research and understand the risks of investing in a REIT.

Precious metals

Investing in certain precious metals like gold, silver, and platinum may be allowable with some self-directed 401(k) plans. However, these precious metals must meet specific requirements by the IRS — including purity standards and storage restrictions — to be held in a self-directed 401(k). Self-directed 401(k) plan participants may be able to invest in precious metals more easily via stocks or certain commodity funds — but again, only if their plan allows such investments.

It’s essential to remember that precious metal investing can be high risk, since gold, silver, and other metals can be highly volatile in value. Potential investors would need to be well prepared for that kind of risk.

Investments That Aren’t Allowed Under Self-Directed 401(k) Plan Rules

While there are a number of different types of investment vehicles that are included in many self-directed 401(k) plans, regulatory rules do prohibit specific investment activities tied to several of those asset classes. The following investment strategies and associated transactions, for example, would not pass muster in self-directed 401(k) plans.

Real Estate With Family Ties

While investing in REITS may be allowed in some self-directed 401(k) plans, using real estate for extended personal gain is not allowed. For example, that could include buying an apartment and allowing a family member to live there, or purchasing a slice of a family business and holding it as a 401(k) plan asset. Neither of these scenarios is allowed under 401(k) plan regulatory rules.

Loans

Self-directed 401(k) plan consumers may not loan any plan money to family members or sign any loan guarantees on funds used in a self-directed 401(k) plan.

No Investment Benefit Beyond Asset Returns

Self-directed 401(k) plan holders cannot earn “extra” funds through transactions linked to plan assets. For example, a plan holder can invest in a REIT under 401(k) plan rules (as long as their plan allows for it) but they cannot charge any management fees nor receive any commissions from the sale of that property.

Basically, a self-directed 401(k) plan participant cannot invest in any asset category that leads to that plan participant garnering a financial benefit that goes beyond the investment appreciation of that asset.

The Takeaway

While self-directed 401(k) plans can add value to a retirement fund, self-directed retirement planning is not for everyone.

This type of account typically requires more hands-on involvement from the plan holder than a traditional 401(k) fund does, and it may incur more fees. Additionally, investing in alternative investments comes with higher risk, which may not be suitable for some investors. Another type of retirement account may be a better option in this case.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

What is the difference between an individual 401(k) and a self-directed 401(k)?

A self-directed 401(k) gives account holders more investment choices, as well as more control over their own retirement plans. Instead of being limited to a packaged fund as they would be with an individual 401(k), an investor can choose specific stocks, bonds, mutual funds, and potentially even alternative investments (depending on what the plan allows), in which to invest their retirement money.

Can I roll my traditional 401(k) into a self-directed 401(k)?

Yes. You can shift funds from a previous or existing 401(k) plan or individual retirement account (IRA) into a self-directed 401(k). The exception to this is a Roth IRA, which can’t be transferred.

How is a self-directed 401(k) taxed?

Like regular 401(k) plans, all self-directed 401(k) plan contributions and asset gains are tax-deferred until withdrawn. With self-directed 401(k)s, there is a 10% tax penalty for early withdrawals (before age 59 ½), the same as with traditional 401(k)s.