The Importance of an Emergency Fund

An emergency fund is an essential corpus that you must keep aside to tackle emergencies. It is a fund that you can fall back on at the hour of crisis or for unexpected and unplanned scenarios, and not for meeting your routine expenses. So, you must design it specifically to meet unanticipated financial shortfalls that may apply to you.

Why keep emergency fund liquid

To be in a position to cover unexpected expenses is the reason why an emergency fund should be liquid, it is the most critical feature that you should keep in mind when you are choosing where to park your emergency fund. You should be able to withdraw the money when you need it and with no delay. At the same time, you should ensure that you do not get penalised in the form of an exit load or pre-withdrawal penalty. The value of the amount invested should not go down either and must deliver excellent returns.

Why investments can’t serve as your emergency fund

It’s not just crypto that shouldn’t be your go-to source for emergencies. Any investments you hold in a brokerage account, like stocks and bonds, fall into the same category for one big reason — their value can fluctuate.

Let’s imagine you set aside $10,000 in crypto or stocks for emergencies, only in three months’ time, the value of that investment has fallen to $8,000. If you happen to need money right there and then, you could be forced to liquidate your stocks or crypto at a loss — whereas waiting things out could mean letting your investments’ value climb back up to $10,000.

That’s why you’ll hear time and time again that a savings account is really the best place for your emergency fund. When you put $10,000 into the bank, that sum can’t go down (unless, of course, you take withdrawals). If anything, it can only go up, because you’ll earn some amount of interest on your money. That’s not at all guaranteed to happen with investments like stocks or crypto, which is why you can’t count on them in a pinch.

How much money should you have in savings?

You’ll hear different things with regard to how much of an emergency fund you need. The old convention was to have enough cash to cover three to six months of essential living expenses. In the wake of the pandemic, though, many financial experts have been advising people to save more like six to 12 months’ worth of living expenses.

The reality is that the amount of emergency savings you decide to amass should hinge on factors such as how secure you feel in your job, how flexible your bills are, and whether you have dependents. But let’s say you decide a six-month emergency fund worth $18,000 suffices for your needs. That $18,000 should sit solely in cash. But if you manage to save an extra $2,000, that’s money you can put outside of the bank. If you decide to use it to buy stocks or crypto, that’s perfectly fine.

Don’t make a mistake you’ll regret

Investing in crypto has risks. You may be comfortable taking them on. But one risk you shouldn’t take is putting your emergency savings into an investment that could lose money. And so if you’re serious about protecting yourself from financial surprises, make sure to house your emergency fund in the bank.