Best for: Anyone who thinks their investment portfolio can double as an emergency fund.
Emergency funds are boring. They sit in a savings account earning 3% if you’re lucky. Meanwhile, your investment portfolio is up 15% this year and you’re wondering why you’re keeping money in cash.
Here’s why: because you need money that doesn’t disappear when you need it most.
The Problem With Using Your Portfolio as an Emergency Fund
Let’s say you’re 90/10 stocks and bonds, and you keep your emergency fund invested because “it’s earning better returns.” Your car needs a $3,000 repair. No problem, you’ll just sell some stocks.
Except the market is down 20% this month. Your $100,000 portfolio is now worth $80,000. To get $3,000, you need to sell $3,000 worth of stocks that were worth $3,750 a few weeks ago.
You just locked in a loss. And when the market recovers, you won’t benefit from that $3,750 bouncing back because you already sold it.
Now imagine you lose your job during that same downturn. You need $50,000 to cover a year of expenses while you find work. Same problem, but 16 times worse.
What an Emergency Fund Actually Does
An emergency fund is insurance against being forced to sell at the worst possible time.
When the market crashes, you don’t touch your investments. You live off your emergency fund. Your portfolio recovers without you having to sell anything. When you’re back on your feet, you replenish the emergency fund and move on.
It’s not about earning returns. It’s about not losing money when everything else is going sideways.
How Much You Need
The standard advice is 3-6 months of expenses. That’s fine if you’re employed with a stable income. If you’re self-employed, freelance, or in an industry with longer job searches, aim for 9-12 months.
Calculate your actual monthly expenses. Not what you think you spend. What you actually spend. Multiply by the number of months you want covered. Put that in a high-yield savings account and don’t touch it unless it’s an actual emergency.
A vacation is not an emergency. A broken transmission is.
Where to Keep It
High-yield savings accounts are currently paying around 2-3%. That’s where your emergency fund should live. Not in stocks, not in bonds, not in CDs you can’t access without penalties.
You want this money available immediately with zero risk of loss. Savings accounts do that. Everything else introduces either risk or lock-up periods you don’t want.
The Bottom Line
Emergency funds are boring by design. They’re supposed to sit there doing nothing most of the time.
But when your car breaks down, or you lose your job, or your water heater floods your basement, that boring cash becomes the most important money you have.
Because it means you don’t have to sell your investments at a loss to cover life’s inevitable disasters.
Your portfolio can recover from a crash. Your bills can’t wait.