Here's How Having a Large Emergency Fund Helps Me Be a Better Investor

I'm someone who's always been what I'll call financially paranoid. (That may not be an official term, just FYI.) Even during periods when I'm saving consistently, I'm often worried about just not having enough money. It's largely for this reason -- paranoia -- that I opt to maintain a larger emergency fund than most people need.

The core of my work is writing about personal finance, and I often tell readers to aim for three to six months' worth of essential bills in an emergency fund. The logic is that a sum that size would likely be enough for the average person to get through a period of unemployment, assuming we're not in an extreme recession.

I, on the other hand, choose to keep 12 months' worth of living expenses in my savings account for emergency purposes. And OK, that's not only due to paranoia. I also opt to save more because I'm a freelance writer.

If all of my clients were to suddenly stop wanting my services, I'd have no recourse. I wouldn't be eligible for severance, and I wouldn't get unemployment benefits. So the way I see it, I need more financial protection than the typical salaried worker.

Because I keep so much cash in savings, you could argue that I'm doing myself a bit of a disservice. See, right now, savings accounts are paying somewhere in the range of 4%, but that's historically not been the case. A more reasonable assumption is getting 2% back on your savings over time.

The stock market, on the other hand, has averaged an annual 10% return over the past 50 years. And it doesn't take a math genius to know that it's better to get a 10% return on your money than 2%.

As such, I could conceivably take some of the money I have in emergency savings and transfer it into a brokerage account. But I'm not going to do that.

See, I strongly believe that having a larger emergency fund helps me be a better investor. Here's why.

When you take fear out of the equation

Let's say you don't have much of an emergency fund, but you happen to have a $10,000 stock portfolio. If you need to make a $3,000 car repair, what you could do is tap your investments to drum up the cash.

That's not a terrible thing if your portfolio's value is up or steady at the time. But what if you're forced to liquidate $3,000 in investments at a time when their value is down? In that case, you're locking in losses in your portfolio rather than riding things out.

A big reason I keep extra cash in my emergency fund is that I frankly don't ever want to have to do that. I don't want to land in a situation where I have to lose money on stocks because I need cash at a time when the market is down. And the logical part of me knows I shouldn't have to because I have extra emergency savings.

My larger emergency fund helps me invest with more confidence and take on more risk in my portfolio when it's appropriate to do so. Granted, I'm not really the type to chase speculative investments (no crypto for me). But I may choose to buy shares of a stock that has potential but I'm not totally sold on if I know full well that I'll have plenty of time to see that stock take off.

It's OK to load up on cash -- to a point

I don't regret keeping a year's worth of expenses in the bank, even though I know I'd make more on some of that money by investing it in stocks. At the same time, I do acknowledge that it would probably not be smart to keep more than a year's worth of bills in savings.

If I were to lose my job and fail to get any sort of writing gig for months on end after the fact, I know I wouldn't just give up. I'd drive for a ride-hailing service or deliver pizzas or do whatever it took to earn some sort of income. So I'm comfortable not adding to my emergency fund at this point.

I'm also comfortable with the idea of losing out on higher returns on some of my cash because having it in savings gives me peace of mind. And sometimes, we pay more for peace of mind. It's the reason many of us buy insurance, install alarm systems, and so forth.

If you feel that you need a larger emergency fund than the typical worker, don't feel bad about the higher returns you're potentially giving up by not investing that money. Instead, take the opportunity to invest your remaining funds with more confidence. And feel good about the fact that you most likely will not have to cash out investments when they're down, due to a poorly timed unplanned expense.