Tips for Using Your Investment Account as an Emergency Fund

by Miranda Marquit · 0 comments

A couple of years ago, I began using a “regular” taxable investment account as my emergency fund. So far, it’s worked out reasonably well for me. I have a more liquid account with less money, just for quick access, but I have a good amount in the investment account that can be drawn on.

Advantages of Using an Investment Account as an Emergency Fund

One of the things I’ve really liked about using the investment account is that the money grows faster. If you put your emergency fund in a savings account, the low rate means that you are lucky to get 1% APY. You can use a CD ladder, but you have to be ok with having the money tied up for longer periods of time.

With the investment account, I invest in an all-market ETF, and the money has grown nicely over the last couple of years. I use an automatic investment plan to have the money automatically taken from my checking account each month and invested in the fund. The money offers the potential for better returns, and it’s fairly liquid. It usually only takes a few days for me to get my money if I need it (as I did two years ago to pay for the aftermath of a flooded basement).

However, it’s important to note the risks. Even though an all-market ETF is generally considered fairly low risk, it’s still an investment, and it can still lose value. If you end up in an emergency situation, you might have to sell at a loss (but at least you can get a tax deduction for the loss). You have to be careful, because you don’t want to risk big losses with your emergency fund.

Things to Keep in Mind with an Investment Account Emergency Fund

If you decide to go this route with your emergency fund, here are a few things to keep in mind:

  • Have some very liquid funds: Even though the bulk of my emergency fund is in the investment account, I have some very liquid funds available to me. This way, if I need immediate access to money, I can get it.
  • Plan for a wait: It usually take between five and seven business days for me to get my money when I use the investment account. That means I have to plan for the wait. So far, none of my emergencies have required the need for immediate money, so the wait hasn’t been a problem. But if I was in a different situation, I could use the more liquid portion of my emergency fund to hold me over for a few days.
  • Choose something relatively low risk: Your investment should be something that is relatively low risk. I chose an all-market ETF because it exposes me to the whole market, rather than hanging my emergency fund on my stock picking ability. As long as the market is trending generally upward over time, my emergency fund should do ok. I have one friend who chose a bond fund for his investment.
  • Use dollar cost averaging: Be consistent as you build your fund. Dollar cost averaging can help you build your emergency fund automatically.

Would you consider using an investment account as your emergency fund? If not, a credit card can also act as your emergency fund as long as you are careful.

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