Emergency Fund: Should You Invest It or Keep It in Cash?

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Having an emergency fund to cover unexpected expenses can be a life-saver financially. But does keeping three to six months of expenses in a low-interest savings account really make sense, or should you look to invest it in higher-returning areas?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, runs through the pros and cons of keeping an emergency fund in cash versus investing it. Dan notes that the primary purpose of an emergency fund is easy access, arguing toward keeping at least some money in cash. But he notes that a balanced approach of keeping some money in liquid dividend-stock investments like iShares Select Dividend (NYSEMKT: DVY  ) or SPDR S&P Dividend (NYSEMKT: SDY  ) can be a smart way to improve returns. Dan emphasizes the importance of diversification, suggesting how some international dividend stocks like Unilever (NYSE: UL  ) and BP (NYSE: BP  ) as well as fixed-income alternatives like Vanguard REIT Index (NYSEMKT: VNQ  ) or master limited partnerships can maximize the chances of having cash available without having to sell investments at a loss. 

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On January 18, 2014, at 2:20 PM, jdmeck wrote:

    Keep it in cash. At least until after the next crash.

  • Report this Comment On January 18, 2014, at 11:56 PM, herky46q wrote:

    Hard to believe the Fool is even suggesting risky investments for an emergency fund.

  • Report this Comment On February 28, 2015, at 2:38 PM, coffeedoc1 wrote:

    I designate the excess cash value in my blended whole life insurance policies to be my emergency fund. I can have the money sent to me in 5 business days (any more urgent need can be floated on a credit card until the Insurance check arrives and then paid off before interest accrues). If the emergency is of a short term nature, I can take the insurance money as a loan to be paid back after the emergency has passed (with a differential interest rate of only 0.7% between what the insurance company charges me and what they pay me on the cash value in my policy). If the emergency is permanent, I can take the money out of the policy as a withdrawal, which lowers the total death benefit but does not have to be paid back. Meanwhile, the cash value in my policy can never go down with the market and earns 3.5% per year, year in and year out while I am not having emergencies - beats any bank savings account or CD and even beats the safety and returns of most bond funds or even the dividend funds mentioned above (which yield less than 3.5% and can go down with market fluctuations.) Safe, secure, liquid and has the added advantage of providing death benefit to my family. In my opinion it is the perfect place to hold emergency fund money.


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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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