Why Do You Need an Emergency Fund?

A strong emergency fund is a cornerstone of financial wellness. It’s a pool of cash designed to see you through unexpected financial challenges, whether they are minor inconveniences or major expenses. Here are some scenarios where an emergency fund can be invaluable:

• Home or car repairs
• Periods of unemployment
• A temporary drop in income
• Medical emergencies

Without a healthy emergency fund, you may have limited financial options, potentially leaving you reliant on high-interest credit cards. As of the second quarter of 2023, the average credit card annual percentage rate (APR) was over 22%, according to the Federal Reserve. With an emergency fund, you’re essentially borrowing money from yourself, interest-free, and can replenish your savings over time.

Should I Invest My Emergency Fund?

No, it’s best not to invest your emergency fund, and here’s why:

You Want Easy Access to Your Emergency Fund

An emergency fund provides peace of mind and can help you navigate unexpected financial situations. You’ll want to keep this money within reach. Investing your emergency fund in the stock market or other high-risk investments exposes you to potential losses and can make it difficult to access your money quickly.

Investment Losses Are Always Possible

Investing your emergency fund in options like cryptocurrency, a new business, real estate, or a brokerage account poses significant financial risks. Returns are never guaranteed, and investment losses are always possible. The goal is to safeguard your emergency fund.

Where Should I Keep My Emergency Fund?

The following accounts provide liquidity and the opportunity to earn interest on your emergency fund:

High-Yield Savings Account

This type of account offers competitive interest rates, much higher than those of traditional savings accounts. This can help grow your emergency fund without any effort on your part.

Money Market Account

A money market account is an interest-yielding account that tends to offer higher-than-average annual percentage yields (APYs). Most come with a debit card or checkbook, making it easier to access your money. Just be sure not to dip into your savings for non-emergencies.

Certificate of Deposit (CD)

While a CD isn’t a great place to keep your entire emergency fund, you might consider using it for a portion of your savings. With a CD, you can lock in a strong rate and allow your money to grow until the account matures. The trade-off is that you’re giving up access to your funds. Withdrawing money before the term ends usually results in a fee.

The Bottom Line

An emergency fund is the centerpiece of a healthy financial plan. You’ll want to keep it in a liquid account that allows you to withdraw funds quickly if needed. Meanwhile, it’s possible to earn interest on your savings. Investing your emergency fund isn’t advised because you run the risk of losing money, and you could also sacrifice liquidity.

One of the biggest benefits of an emergency fund is that it can help you avoid taking on debt to get through a financial surprise. Free credit monitoring with Experian is another way to keep your credit going strong.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand the importance of financial stability and are here to help you with all your mortgage needs. Whether you’re looking to buy a new home or refinance your existing mortgage, our team of experts is ready to assist you. Call us today at 213-732-3074 to learn more about our services and how we can help you achieve your financial goals.