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Should You Invest Your Emergency Fund?

April 01, 2019 · 6 minute read

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Should You Invest Your Emergency Fund?

Life happens. If your company downsizes or you get in a car accident that isn’t covered by insurance, then you probably want to be able to cover any necessary expenses before the situation escalates. Without the money to pay for sudden emergency expenses, a small problem can easily spiral out of control.

But knowing you should have an emergency fund is different than actually having one. And it’s not quite as simple as saving up cash to hide under your mattress. Where should you put your emergency fund? How much should you have saved? And does it need to be in cash liquid assets, or can you invest your emergency fund? Let’s get all your questions answered now—before an actual emergency comes up.

What Is an Emergency Fund?

An emergency fund is exactly what it sounds like—money you have ready in case of emergencies or unexpected expenses.

Conventional wisdom suggests you should save a minimum of three to six months worth of expenses in case you lose your job or have an unforeseen emergency that stops you from being able to work, but you could save up to 12 months worth of expenses just in case. The exact amount that should be in your emergency fund depends on your specific circumstances.

For example, if your expenses are low and your job is secure, then you might not need as much of a financial buffer. On the other hand, if you’re job is less secure and you have high expenses, such as mortgage payments or children, then you might want a larger emergency fund to tide you over.

Another way to calculate how much you might save is to start by looking at the deductibles on your auto insurance and medical insurance, and be prepared to pay what it would cost to cover those minor emergencies (plus expenses)—at a minimum.

A surprising number of people aren’t always prepared for even minor emergencies. A study by the Federal Reserve found that 41% of adults wouldn’t be able to cover even a $400 unexpected expense—but would instead put it on a credit card or borrow money from a friend or family member.

You could get started building your emergency fund by using a small windfall to jumpstart your saving, such as a tax refund, an unexpected bonus, or even a cash birthday gift. You can then set up your bank account to do an automatic transfer each pay period. Even small contributions add up to big savings, so start with whatever amount you can afford.

Where to Keep an Emergency Fund

After you’ve started saving, the next question might be where to put your emergency fund. You don’t necessarily want to just be squirreling away cash—though you probably want your emergency money to be liquid.

Liquidity simply means it’s relatively easy to access. Cash, for example, is the most liquid form of money, since you have it in your hand. Funds in your 401(k) and other retirement accounts can be non-liquid, especially considering the withdrawal penalties associated with those accounts. A home is also a non-liquid asset since you’d have to go through the process of selling it before you could use that money for something else.

To make sure the money is easy to access, one option is to save an emergency fund in an FDIC-insured savings or checking account. An interest-bearing cash management account could be a good option if you’re looking for an easy-access savings account with a competitive interest rate.

Learn more about saving, spending, and earning—all in one product. SoFi Money is a cash management account that has high interest and no fees. (Interest rate and fee structure are subject to change at any time.) Get started with SoFi Money to house your emergency fund.

If you’re still interested in increasing your return, one alternative to a savings account is investing your emergency fund—but there are pros and cons to that too.

Should You Invest Your Emergency Fund?

The default answer, historically, has been no, you shouldn’t invest your emergency fund because of the potential risk and the likelihood that you won’t be able to access it when you need it. But, increasingly, investing your emergency fund is becoming a viable option—particularly if your situation makes you less reliant on cash at hand.

There are also a number of reasons you might want to consider investing sooner rather than later—the returns can add up and, if you wait, you could be leaving money on the table.
Let’s evaluate the pros and cons:

The Pros of Investing an Emergency Fund

•   You could make a higher return. The number one reason to park your emergency fund in an investment account is the potential for a higher return on your money than in a savings account. Some research suggests that if you invest your emergency fund, you’re actually more likely to have more money when you need it in an emergency.
•   You can still access it. There are a number of investment options, such as a regular brokerage account or even a Roth IRA, that still allow you to withdraw your money if you need it.

The Cons of Investing an Emergency Fund

•   It’s less accessible. Even if you temporarily put an emergency expense on a credit card and then pull money out of a brokerage account to pay off the credit card when it’s due, that’s still less accessible than simply having the money in your bank account.
•   There’s always some risk. If you invest your money—whether in a conservative mutual fund or pick and choose your own stocks—it always carries some risk. While the market tends to go up in the long-term, it can dip at any given point, which can be a problem if your investments dip at the same time you need to tap into them.

If you’re considering investing your emergency fund, then it can be helpful to understand your options and the basics of investing.

Options for Investing An Emergency Fund

Part of the decision to invest your emergency fund will be finding an appropriate account. There are a few options that could work, depending on your financial situation.

One option is to invest using a Roth IRA, which allows you to withdraw the money you’ve put in without penalty if you meet all the requirements . , so can be a good emergency fund investment option. Alternatively, you could choose a conservative mutual fund, which could give you a better return than a savings account but have less risk than investing in say purely stocks.

The general rule of thumb when it comes to investing is, the higher the risk, the higher the potential for return—but a hugely risky investment could be counterproductive if you intend to use the money as an emergency fund. Stocks and bonds tend to be riskier than other investments in the short-term, but the market trends upwards in the long-term.

An investment account like SoFi Invest® gives you flexibility when it comes to investing. You could set up automated investing or active investing, depending on what works best for your financial goals.

We’ll help you with goal planning, asset diversification, portfolio selection, and will periodically rebalance your account automatically to stay in line with your desired risk tolerance. And as a SoFi member, you’ll have unlimited access to financial advisors, at no extra cost.

If you don’t want to invest your entire emergency fund, you could consider saving a portion in a traditional savings account and investing another allotted amount. That way, you could rely on cash for immediate emergencies and have a backup of invested funds you can rely on in the event that something major, and more expensive, happens.

What is most important is that you have a plan to deal with emergencies—because like it or not, eventually, you’ll likely have some unexpected event or cost that you need to cover.

Being prepared with an emergency fund, in a savings or investment account, can help prevent you from falling deeper into debt. If you’re not prepared with a plan, it can be easy to rely on credit cards to pay for financial emergencies. But that can lead to a lot of interest and growing credit card debt if you’re not careful.

If you’re not sure how to best manage your emergency, talk to a professional who can give you advice personalized to your situation. When you open an account with SoFi Invest, you’ll have complimentary access to a team of financial advisors who can help you craft your investment strategy—including your emergency fund.

If you want more information on your options or have additional questions about how to invest your emergency fund, speak with a SoFi advisor to begin crafting your financial plan.


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The information provided is not meant to provide investment, tax or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory and automated services offered through SoFi Wealth LLC. An SEC registered investment advisor. SoFi Securities LLC, member FINRA / SIPC .
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