3 reasons not to put your emergency fund in a brokerage account
If you currently have your emergency fund in a savings account, you may not be happy with the amount of interest you are receiving on that money. In fact, you might be tempted to move that amount of money from a savings account to a brokerage account, where you can invest it and potentially generate much higher returns. But here’s why it’s not recommended.
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1. Your principal is not protected
If you put $ 10,000 in a savings account, your account balance cannot go below $ 10,000 unless you withdraw one. On the contrary, your balance can only stay the same or increase after your modest interest payments are reached. On the other hand, when you invest in a brokerage account, your capital is not protected. So the $ 10,000 you invest one day might only be worth $ 8,000 a few months later if the value of your investments goes down. This means that if you need the money in a pinch, you may not be able to access the amount you think you have.
2. Stocks can be very volatile
There’s a reason so many people make a lot of money investing in stocks – they have the potential to generate very high returns. But in return for those solid returns, you’re taking on a fair amount of risk – and it’s not something you can afford to do with your emergency fund. Rather, you need to make sure the money is there for you when you need it.
3. You could find yourself in debt in an emergency
The point of having an emergency fund is to avoid going into debt when an unforeseen expense arises, or if you lose your job and need money to pay your bills. But if you keep your emergency savings in a brokerage account and your investments are down when you need that money, you might not want to make a withdrawal. If you do, you’ll lock in a loss rather than giving yourself the chance to get over it and wait for your investments to regain in value. And if you can’t use your emergency cash to cover your surprise bill, you might have to go into debt if that expense can’t wait.
There is a right time and a wrong time to invest
Investing money is a solid way to make your wealth grow over the long term. But you shouldn’t invest money for emergencies. Instead, have an emergency fund with enough money to cover three to six months of expenses that are hidden in a savings account. Any money you save beyond this point can be invested with the understanding that the stocks you buy can gain or lose in value over 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 are not happy with the interest you are currently getting on your emergency fund, you may want to look to another bank and see if there is a better rate.