An Emergency Fund

During these days of economic uncertainty due to COVID-19, an economic recession, and political uncertainty that could impact the economy, it seems an appropriate time to discuss an emergency fund. An emergency fund is a readily available source of assets to help people navigate financial dilemmas, such as the loss of a job, a debilitating illness, a major repair to home or car—not to mention the kind of major national crisis the coronavirus pandemic has created. The purpose of the fund is to improve financial security by creating a safety net of cash or other highly liquid assets that can be used to meet emergency expenses. It also reduces the need to either draw from high-interest debt options—such as credit cards or unsecured loan—or undermine your future security by tapping retirement funds. (Investopedia … https://www.investopedia.com/terms/e/emergency_fund.asp )

Unfortunately, too often people make unhealthy decisions with their emergency funds. Some just can’t get over setting cash on the sidelines when it can be making higher returns in the market. And, to be sure, yes it can. But it’s important to keep in mind that safety and liquidity should be the core purpose of your emergency fund, not return on your investment. An emergency fund isn’t useful to you in an emergency if you can’t access it quickly. Those funds should be in some kind of savings instrument, such as a money market savings account, that enables you to feel confident it will always be available if you need it. Your emergency fund isn’t actually an emergency fund if you run the risk of losing large amounts of it in an economic downturn by investing it in more aggressive investments when a downturn that would reduce the value of those investments is one of those times when you might need your emergency funds. If you keep in mind that part of the reason for using emergency funds is so that you don’t have to liquidate other investments that might need time to recover due to economic conditions, it may help you feel more comfortable having some funds sitting on the sidelines.