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

Having your emergency fund in cash makes sense for access, but returns are terrible. Should you invest instead? Learn the pros and cons here.

Jan 18, 2014 at 1:35PM

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. 

Why investing makes sense
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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