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Ask Dave

An Emergency Fund is Not an Investment

A listener from Twitter asks if a balanced mutual fund is good for your emergency fund.

QUESTION: A listener from Twitter asks if a balanced mutual fund is good for your emergency fund. Dave says no and explains why.

ANSWER: You should put it in a money market account. You should never put your emergency fund in something that can go down in value. You should never put your emergency fund in something that charges you a penalty for taking it out early, like a CD.

Your emergency fund is not an investment. It’s insurance. Insurance costs you money to protect your investments. That’s what insurance does. The money you have sitting there just for emergencies is not there to make you money; it’s there to protect your investments because if you don’t have the emergency fund, you will borrow money and pay out interest and horrible terms to some stupid bank. Or you’ll cash out your 401(k) and take a huge hit about the time it’s down, and you’ll get the taxes and the penalties by the IRS.

You’re protecting your home from foreclosure by having an emergency fund. Your emergency fund is insurance. It costs you money. It’s not invested well because it’s not invested at all. It’s parked in a money market account. Quit trying to make that money make money.