3 Reasons Not to Put Your Emergency Fund in a Brokerage Account
by Maurie Backman | Updated July 21, 2021 - First published on May 29, 2021
A brokerage account could help you grow wealth -- but it's the wrong place for your emergency savings.
If you have your emergency fund in a savings account right now, you may not be happy with the amount of interest you're getting on that money. In fact, you may be tempted to move that pile of cash out of a savings account and into a brokerage account, where you can invest it and possibly generate much higher returns. But here's why that's not recommended.
1. Your principal isn't protected
If you put $10,000 into a savings account, your account balance can't drop below $10,000 unless you take a withdrawal from it. Rather, your balance can only stay the same or go up once your modest interest payments hit. On the other hand, when you invest in a brokerage account, your principal amount isn't protected. So the $10,000 you put in one day could be worth just $8,000 a few months later if your investments' value declines. That means if you need money in a pinch, you may not have access to the amount you think you have available.
2. Stocks can be very volatile
There's a reason so many people make great money investing in stocks -- they have the potential to deliver very high returns. But in exchange for those solid returns, you take on a fair amount of risk -- and that's not something you can afford to do with your emergency fund. Rather, you need to make sure that money is there for you when you need it.
3. You could wind up in debt when an emergency strikes
The purpose of having an emergency fund is to avoid debt when an unplanned expense arises, or if you become unemployed and need cash to pay your bills. But if you keep your emergency savings in a brokerage account, and your investments happen to be down when you need that money, you may not want to take a withdrawal. If you do, you'll lock in a loss rather than give yourself the option to ride things out and wait for your investments to regain value. And if you can't tap your emergency cash to cover your surprise bill, you may have to take on debt if that expense can't wait.
There's a right time and a wrong time to invest
Investing money is a solid way to grow wealth on a long-term basis. But you shouldn't invest any money that's earmarked for emergencies. Rather, have an emergency fund with enough cash to cover three to six months of expenses that's stashed away in a savings account. Any money you save beyond that point can be invested, with the understanding that the stocks you buy may gain or lose value throughout the years.
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In fact, investing your money is a smart move when it comes to your retirement savings, but for your emergency savings, the bank is the best bet. If you're unhappy with the interest you're getting on your emergency fund right now, you may want to shop around for a different bank and see if there's a better rate out there.
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