How to Invest Your Emergency Funds? + Other Questions (2021)

If you don’t have a financial safety net tucked away for the rainy days, you are setting yourself up for failure and disappointment.

An emergency fund will help you get through moments when life throws the unexpected your way. It can help with car repairs, medical bills, or even house repairs.

But it’s not just enough to build an emergency fund. You can also make your savings work for you through investment.

When properly invested, your emergency fund can work for you while you sleep and help build wealth over time.

But the question is: “how to invest your emergency fund?” The good news is that you don’t need to be a financial expert to make your money work for you.

This guide will help you take advantage of investments while minimizing risk for the future. It covers everything you need to know before and after investing your emergency funds.

Are you ready? Good!

Let’s start by first understanding what an emergency fund entails.

What is an Emergency Fund?

What is an emergency fund

An emergency fund is an accumulated sum of money set aside for emergencies. This could be backup for a job loss, car accident, medical bills or other unforeseen events that cause financial difficulty.

Unforeseen situations or surprises that make you have no choice but to acquire money immediately can happen with anyone.

Having an emergency fund gives you peace of mind knowing that you will have the funds to cover unexpected expenses, avoid extra debt and maintain good credit.

Consider an emergency fund like insurance: rather than hoping you don’t need it, you’re better off having it and not needing it than needing it and not having it.

But what if investing could help grow your money faster than just stashing it in a savings account?

Investing emergency funds is, therefore, an excellent way to create long-term financial security.

Unfortunately, some people don’t know how to invest their emergency funds or feel afraid to try because they are unsure where to start.

The truth is, there are many factors you need to consider before investing your emergency fund. To this, we now turn.

Should You Really Invest Your Emergency Fund?

Should You Invest Your Emergency Fund

The idea of investing your emergency fund or “rainy day” money can be a daunting one, especially if you’re not sure how to make the most of your cash.

The stock market is riskier than FDIC-insured saving accounts but is also capable of producing far greater returns.

It is important to ask yourself whether you should invest your emergency fund or just leave it in a savings account so you can easily access it in the case of an emergency.

Here are some questions to ask yourself before investing your emergency fund:

1. Do you have a stable job?

The most important question you need to consider before investing your emergency fund is—is your job stable? If not, you are not ready yet.

One of the major challenges that an emergency fund is to address is the unexpected loss of job.

However, this is not a risk for everyone. If all of the following factors are true, your possibilities of being fired from your job are few:

  • You are working for a big company that keeps track of performance-based terminations.
  • Your performance assessments show that you’re hard-working.
  • You’re not doing something unethical or breaking the rules.
  • The company you are working with hasn’t had a history of laying off employees in your position.

Think of how these factors relate to your case. If these factors do not relate to your case, it is unwise to invest your emergency fund.

2. Do you have additional income opportunities?

If you have additional income opportunities, such as a seasonal job or side business, you can invest your emergency fund without having to worry.

Your extra income streams will be able to bring in some extra money each month, which you can use before accessing your investment when an emergency strikes.

Having an extra income can help you build wealth faster. There are different site hustles out there that can earn you additional income.

It is important that you look for opportunities that suit your passion and expertise. It will make things easier for you.

You don’t want to have regrets when the unexpected occurs, so ensure you’ve other means of income before investing your emergency fund.

3. Could you easily reduce your monthly expenses?

Every month, you have to spend a certain amount on expenses like your utility bills or groceries.

But could you easily reduce your monthly expenses? Not only once – could you do it for more than one month if you need to?

If there are ways you can reduce your monthly expenses, then you can invest your emergency fund.

Think for a second about how much money you spend each month on your expenses. Would there be a major setback if you should cut it in case of emergency?

Be honest with yourself. The easier it is to reduce your monthly expenses, the safer it will be to invest your emergency fund.

4. Do you have access to cheap sources of cash?

Do you have an immediate source of cash that you can access quickly if an emergency arises? If the answer is no, leave your emergency fund in a savings account.

What if you must pay back your debt by the end of the week? Can you also afford it?

You may not even realize how vulnerable an unexpected major expense would leave you until it happens.

Your low-cost loan should be sufficient to finance your basic living costs for a few months. It’s also a good idea to double-check the deductibles of your car and home insurance plans.

If the unexpected strikes and you lose your work and your car in the same week, you’ll need money to fund your insurance as well as your living expenses.

Keep in mind your health insurance charges as well.  In the case you require urgent surgery, your health insurance may not cover the expenses if you didn’t complete your annual deductible.

Take caution by ensuring that you are ready for whatever comes your way.

5. Do you have a high tolerance for risk?

How much risk are you willing to take? Everyone will have different tolerance for risk, and with varying degrees of risk comes the potential for higher rewards as well as greater loss.

Keep in mind there is no risk-free investment. Investing your emergency fund is a risk because you could lose some or all of your money. Sure, there are benefits, but there are also risks.

You should only consider investing in stocks or mutual funds if you have spare money that you can afford to lose.

The burden of struggling with a competitive market in the short term, along with the expense of an unforeseen disaster, could be too much to bear.

When the economy is particularly good, the gap between keeping $15,000 in cash versus spending could be as much as $2,000 in a single year.

This suggests a 2% interest rate on savings deposits and a 15% yield on assets. However, if the price falls, you might risk $2,000 as well. You must determine whether or not the risk is worthwhile.

The Middle Ground?

You may still strike a balance by dividing the emergency fund between investment and savings.  If you decide to invest, make sure it’s in exchange-traded assets in which you can sell.

Since they are diversified and stable, exchange-traded funds (ETFs) in local companies are a great choice.

Don’t put your emergency fund into real estate, your brother’s store, or some other financial asset that you can’t sell quickly.

When To Invest Your Emergency Fund?

When you should invest depends a great deal on your current situation and your emergency plan’s size.

The worst thing you should avoid is to invest your emergency at the wrong timing. However, deciding when to invest your emergency fund can be challenging.

What one person might consider an appropriate time frame for investment could be the wrong one for another.

Investing is like a game of chess. You try to figure out what moves the other person will make so that you can one-up them.

For example, you may be working for a big company, and the other party is one of their competitors.

The two of you are constantly trying to maneuver yourself into a better position versus your competitor.

You start by testing the waters by implementing small tests. But bear in mind that it’s going to take more capital and time than you expected.

So, what do you do? You decide to wait. However, waiting too long comes with its risks as well as rewards.

The fact is once your emergency fund is matured enough and you are comfortable with the current investment market, it’s time to invest.

What To Do Before Investing Your Emergency Fund?

Draw a personal financial roadmap

Do you know where your money is going? Without a plan, your money may end up in places you never dreamed of.

Planning for your financial future is like driving a car. You have to make a roadmap to get you to your financial destination.

Simply looking at your bank account balance or monthly budget won’t be enough to give you the information you need.

Sit down and take a careful look at your whole financial position before making any investment decisions, particularly if you’ve never developed an investment plan before.

You need to identify your priorities either personally or with a financial expert’s guidance before making any investment.

Once you set smart strategies, you should be able to build financial security and reap your investment rewards over time.

Pay off your high-interest credit card debt

It’s important to think about all of the burdens you’re carrying before investing. And you may already be aware that one of those burdens is probably high-interest credit card debt.

There is no better investment plan that pays out than paying off all of your high-interest debt. You’ll save a bundle of money in interest charges.

If you owe a high-interest credit card, the best thing you can do is pay off the debt as soon as possible, regardless of market conditions.

The best thing you should do is create a debt repayment plan that will help you get rid of your high-interest credit card debt.

If you already have a plan for paying off your high-interest credit card debt, that’s great! If you haven’t, ensure that you do so before investing your emergency funds.

Evaluate your risk tolerance

One of the fundamental golden rules of investing is understanding that there is no assurance that your investment will yield a profit in the end.

Any investment entails some level of risk. If you want to invest in securities such as stocks, bonds, or mutual funds, you should be aware that you could lose any or all of your earnings.

Higher investment return is the compensation for taking a risk. If you have a long-term investment target, you’re more likely to earn more money by investing in assets with high risk.

With a long-term financial goal, you can invest in stocks or bonds rather than less risky assets such as cash investment.

However, for a short-term investment plan, investing exclusively in cash deposits might be suitable.

Overfund your emergency savings account

Before investing in stocks or other financial products, please consider increasing the size of your emergency savings account.

The job of an Emergency Fund is to be there for you in an emergency. When you get paid, take money from every paycheck and put it in your bank account.

The common idea is to fund your emergency fund with three to six months’ worth of expenses. But you can overfund that account even more than this for a smooth investment.

Overfunding your emergency account can have a tremendous impact on your financial future. Starting with a slight change and practicing it consistently is perhaps the key to success.

By overfunding your emergency fund account, you may have enough cash to split your investment into different asset categories and still save some for the unexpected.

That way, if things don’t go your way in the stock market, you can always fall back on some of your cash savings.

Be careful investing in a single stock

Don’t put all your eggs in one basket. Do you know how millionaires get to be millionaires? Simple, they don’t invest all their money in a single asset.

Diversifying your investment is one of the most effective ways to reduce your investment costs and risks.

You can be able to minimize your risks and reduce investment return uncertainty by selecting the correct categories of assets without risking too many future gains.

As a beginner in investing, it is best to learn about several stocks before you begin investing.

You might be better off adding stocks to your portfolio in small amounts regularly.

How To Invest Your Emergency Funds?

How to Invest Your Emergency Fund

First and foremost, congrats! Investing your emergency fund is one of the most reliable ways to build long-term wealth.

Becoming an investor helps you invest in things that have the potential for high returns, such as interest from a savings account or dividends on stocks and bonds.

To ensure that your emergency fund work for your through investment, you need to follow these steps:

Step 1: Know the size of your emergency fund

The first step in determining how to invest your emergency funds is knowing your emergency fund’s size.

This step helps you measure your savings so you can make an informed decision about how big of an investment you can afford to make.

The amount of money you invest is entirely up to you, as it differs from person to person.

You might think that starting a portfolio requires a huge amount of money. The truth is you can start investing with just $100.

The sum of money you start with isn’t the most significant factor; what counts is that you’ve got enough money to invest.

Step 2: Identify appropriate investments

To make the most of your emergency fund, you must understand investments with high-profit potential.

You can consider simple cash deposits such as checking and savings accounts, CDs, and money market accounts for cash investment.

Online savings accounts are often among the highest-yielding cash investments. Also, credit unions often have good returns on cash investment.

To determine which investments will meet your needs, you need to consider several criteria. That starts with how long you need to invest.

Some investments lock you in for a certain period, while others allow for access to your funds whenever you want.

Also, think about whether you’re looking for income generation, growth of capital, liquidity and protection from market downturns, or some combination of these elements.

Step 3: Make your investment

To make your investment, you’ll need a brokerage account, which may be set up and maintained by an individual or company.

You don’t buy shares of stocks directly from the companies that issue them; you buy them through a brokerage firm.

Brokerage accounts are established with commercial banks, savings and loan associations, or investment companies through which stocks and bonds can be purchased.

To be successful in your investing, you need to choose the right type of brokerage account for managing your portfolio. There are several brokerage accounts to choose from.

When looking for the best brokerage account to make your investment, look for one that has the following features:

  • Multiple investment options
  • Affordable fees
  • Good commissions
  • Research and educational resources
  • 24/7 customer service

Step 4: Keep monitoring your investment

Now that you have made your first investment, it is time to monitor its performance.

This way, if things take a terrible turn right after your investment, you can still decide whether to get out of it or let your initial investment ride.

While some investments may do fine without your interference, you will need to make sure that your money is always protected.

Keeping an eye on your investment is key! There are a lot of factors that can affect the bottom line. It’s important to continue to track your return against the index and rebalance when needed.

You should also compare performance against past periods as well. This will help you manage expectations and gauge how close your portfolio is to meeting your goals.

Where to Invest Your Emergency Fund?

Where to Invest Your Emergency Fund

Stocks and Bonds

Stocks offer you a stake in a business, while bonds are loans that you give a company or a government.

The most significant distinction between stocks and bonds is the method of profit generation.

Stocks must increase in value over time in order to be traded on the stock exchange, while most bonds pay a constant rate of interest over time.

You could attempt to gain a better return by investing your emergency fund in stocks and bonds. However, your funds will be less liquid and open to greater risk.

A purchase can take a number of days to conclude and funds transferred to your bank account. Also, stock and bond sales will result in tax implications that you will have to face.

Furthermore, you are never sure when the price will be high or low when you need to sell.

Investing your emergency funds in a less liquid and higher-risk alternative is better if you have a big emergency fund and won’t need all of it at once.

Tax-Free Savings Account (TFSA)

A tax-free savings account (TFSA) is a way to invest your emergency fund without paying tax on any of the investment earnings.

Contributions to a TFSA are not deductible for income tax purposes, and investment income earned in a TFSA is generally tax-free, even when withdrawn.

It’s a type of investment account unique to Canada that anyone over the age of 18 can open with a valid social insurance number and no restrictions on citizenship.

With TFSA, when the stock market is hot and in your favour, you accumulate capital without paying taxes.

When the market turns against you, you can hold those stocks for years to come without having to sell them and pay taxes as long as it fits into your time horizon.

There are different types of TFA accounts, so it is important to choose the one with the highest interest rate.

The most important reason for having a high-interest-rate TFSA is that it can keep pace with inflation.

High-Yield Savings Account

If you’re looking for a rewarding place to invest your money, consider opening a high-yielding savings account.

A high-yield savings account is a type of savings account that pays interest rates significantly higher than the traditional savings account.

This type of account gives you the competitive interest rates of a savings account plus the flexibility of investment.

Depending on the bank, accountant size and other factors, you may earn an annual percentage yield (APY) ranging from 0.5% to 0.8% in a high-yield savings account.

When you’re considering investing your emergency fund in a high-yield savings account, pay attention to the interest rate, fees, restrictions on withdrawals etc.

You can find the best high-yield savings accounts by comparing different options and choosing the bank with the features and rates that make the most sense.

Certificate of Deposit

A Certificate of Deposit is a type of savings account that gives you a higher interest rate in exchange for keeping your money in the account for a set amount of time.

Your investment can last from one month to 5 years. And the longer you wait, the more interest your money earns.

After the CD matures, you may withdraw funds, renew for another term, or roll over into a new CD at current rates.

With a Certificate of Deposit, you can earn higher interest rates on your investment while protecting your money from inflation.

Besides the higher interest rates compared to standard savings accounts, CDs are insured by the FDIC up to $250,000.

Your deposits are protected if anything were to happen to the financial institution backing up the CD.

It’s important to weigh the risks of placing your emergency fund into a Certificate of Deposit account before making your decision.

Though a Certificate of Deposit provides a competitive higher APY than traditional banks, it involves tying up your money for a specific term.

Although if you have an emergency before your CD matures, you can still withdraw your money from a CD but with an early withdrawal penalty.

While few CDs having a no-penalty feature, ensure the feature isn’t exclusive to specific circumstances such as losing your job.

Another way to make the most of your CD investment is by building a CD ladder. Switching between several CDs with different term lengths is a smart approach.

This allows you to earn more money while keeping some of your emergency reserves available. For example, you can open a 3, 12, or 18-month CD account to be ready for any surprise.

Money Market Account

A money market account offers you the best of both worlds: the security of your investment and the interest-earning potential that is more than a checking or savings account.

In addition to offering higher interest rates than traditional savings accounts, money market accounts are insured up to $250,000 by the FDIC.

Opening a money market account requires a higher deposit than opening a standard savings account, but different banks have their terms and conditions.

One of the best aspects of a money market account is that it combines the features of savings and checking accounts.

You can open a money market account at your local bank or online bank. However, online money market accounts tend to have the best offers because of their operating cost and high-interest rates.

There are several options when choosing a money market account. Ensure that you choose an option that works best for your current financial situation and preferences.

Traditional Bank Account

If you don’t want to tie up your money for an extended period or want quick access to the money, consider investing your money in a traditional bank account.

Most people choose to invest in traditional banks. The FDIC insures the deposits in a traditional bank, so you don’t have to worry about taking big risks in the event that the bank goes belly-up.

Traditional banks are known to offer fixed-rate interest rates because they use the money deposited into their account for investments.

Even though traditional banks provide low-interest rates on your investment, a traditional checking or savings account has a low-risk way to save money.

With a traditional bank account, it is possible to get immediate access to your money compared to other bank accounts.

One major problem of investing your emergency fund in a traditional bank account can lead to inappropriate withdrawals at times when you shouldn’t be making any.

To prevent unnecessary withdrawal on your bank account, it’s advisable to open a new account with a different bank.

What are The Best Savings Accounts for an Emergency Fund?

What are The Best Savings Accounts for an Emergency Fund

EQ Bank Savings Plus Account

Open an EQ Bank Savings Plus Account and earn 1.50% interest with no regular banking fees and no withdrawal fees.

EQ Bank is an easy and transparent alternative to the major banks out there. The EQ Bank Savings Plus Account offers a favourable interest rate compared to a savings account.

If you’re just getting started investing or trying to build up your savings, this high-interest savings account is ideal.

Pros

  • High-interest rate (1.50%)
  • $0 monthly cost
  • No hidden fees
  • Fast transactions
  • Unlimited free transactions

Cons

  • Limited banking features (e.g. ATMs, overdraft protection, paper statement options).
  • $200,000 limited savings per individual
  • No physical presence for one-on-one service

Check it out here.

Tangerine Savings Account

The Tangerine’s daily savings account allows for a great deal of flexibility. There is no minimum balance limit, and there are no payments or usage costs.

Tangerine’s whole banking experience is transparent and welcoming, and their savings plans are no different.

To better prepare and achieve spending targets, account holders can open an Automated Savings Platform online.

Pros

  • $0.10 interest rate
  • No monthly fees
  • Unlimited free and unlimited
  • Automated Savings support 
  • No minimum or maximum balance restrictions
  • Free Interac e-transfers
  • Deposits are protected by CDIC up to $100,000

Cons

  • Have less than the standard interest rate
  • No physical presence for one-on-one service

Check it out here.

Scotiabank MomentumPLUS Savings Account

Scotia Bank

If you’re looking for a little more inspiration to invest your emergency fund, the Scotiabank MomentumPLUS Savings Account might be exactly what you’re looking for.

You’ll earn regular interest on your balance with this account, measured regularly, much like a regular bank account.

However, unlike normal savings accounts, you’ll get a bonus if you don’t make any withdrawals within 90 days.

Pros

  • 0.05-0.10% interest rate
  • No monthly fees
  • No minimum or maximum balance restrictions
  • Have physical branches
  • Unlimited transactions
  • Deposits are protected by CDIC up to $100,000

Cons

  • Have less than the standard interest rate
  • It takes longer to earn a higher interest rate
  • You could be charged for an Interac e-Transfers

Check it out here.

Alterna Bank High Interest eSavings Account

Alternate Bank Logo

Alterna Bank, a division of Alterna Savings and a 110-year-old credit union, has been in operation since 2000.

Alterna Bank has been included on several best-of lists for its groundbreaking banking since its establishment.

The Alterna Bank High-Interest eSavings Account is available online, and it provides a competitive interest rate on deposits.

Pros

  • High-interest rate (1.20%)
  • No minimum balance restriction
  • Unlimited monthly free transactions
  • Unlimited free Interac e-Transfer
  • Deposits are protected by CDIC up to $100,000

Cons

  • Limited branches
  • No physical presence for one-on-one service

Check it out here.

LBC Digital High-Interest Savings Account

LBC Digital High-Interest Savings Account is another option to consider when investing your emergency fund.

With 1.30% interest, you will access funds anytime you want with the LBC Digital High-Interest Savings Account.

Automated deposits, electronic fund transfers, and fast transfers between LBC Digital accounts are among the top services you can enjoy from this account.

Pros

  • High-interest rate (1.30%)
  • No minimum balance restriction
  • Unlimited monthly free transactions
  • Free Interac e-Transfer
  • Deposits are protected by CDIC up to $100,000

Cons

  • Charges for returned items, non-sufficient funds, and overdrawn accounts
  • $25 penalty for closing your account within 90 days

Check it out here.

Executive Summary on How To Invest Your Emergency Funds

You want to earn as much interest as possible on your emergency fund, but you also want it to have some flexibility for a rainy day.

Sure, your emergency fund should be there for you in case you have a car accident, lose your job, or are faced with any unexpected cirucstamce that may affect your financial stability.

But if you had to choose between an additional $500 in your savings account at the end of the month or having a catastrophic accident. You’d probably keep the cash.

However, investing your emergency fund to avoid the opportunity cost of missing growth is a smart idea, as long as it suits your particular condition and risk tolerance.

When investing your emergency fund, make sure you’re investing it in low-risk and diversified assets categories.

To be on a safer side, you can split your emergency fund by saving three months’ worth of expenses in a liquid savings account and invest the remaining three months’ worth of expenses.

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