What is an Emergency Savings Fund?

An emergency savings fund is a pool of money created and compiled together with the goal of being stored in case an unexpected life expense or need were to arise. The goal of an emergency savings fund (also sometimes referred to as a rainy-day fund) is to create security in the event of an unexpected emergency or problem that could be handled by having available funds and liquidity. The idea is that these funds act a safety net should anything unforeseen arise.

What’s the Point of an Emergency Fund?

An emergency fund is typically something you want to have readily available in case something goes awry, financially speaking. If you should find yourself in a financial bind you’ll have a backup plan and won’t have to rely on things like lines of credit or people to get you out of a jam. This “safety net” is meant to help you advance past financial hardship, medical bills and other unexpected life expenses like appliances breaking down or car repairs, etc.

In What Form Should an Emergency Fund Be Stored?

The idea of a safety net gives consumers great comfort so much so that many typically give up leave these funds uninvested and without accruing interest and remaining in their checking account. You typically want to leave your emergency savings fund in an account that is immediately available for withdrawal. For most consumers this will mean a checking account where withdrawals are made at will and at your disposal.

Can You Keep an Emergency Fund Invested in the Markets?

This technically defeats the purpose of carrying an emergency fund. Although money can be transferred quite quickly via a brokerage account nowadays (ACHs can sometimes land in your account the following business day) this will defeat the purpose of labeling your funds an emergency savings fund. However, for sale of assets like equities that is typically based on a T + 3 settlement rule in which funds should take 3 days from the date of the transaction in order to hit your bank account. Technically speaking you cannot leave your emergency fund in the form of shares of a company or something that needs to be converted into USD and transferred to a withdrawal account. However, you can leave your funds in a brokerage account in cash if that accounts allows for withdrawals.

What About Earning Interest in a High Yield Savings Account?

High yield savings accounts typically restrict withdrawals per year and depending on your account it could theoretically take some time for the funds to become fully liquid. There are many pros and cons of high yield savings account but being used as an option for emergency savings funds is typically not one of them. These accounts will also take longer than a standard ACH to withdraw into your standard checking account.

Emergency Savings Funds are a great way to add some financial security to your life and without them many consumers would feel a lot less secure about their financial situation.