An emergency fund is basically an insurance policy where we pay the premiums to ourselves.
If you have your emergency funds in an investment account right now, you probably get why this isn't a great place for your cash. With that being said, our memories are short, and in five years everything will be back to “normal”, the market will be soaring, and the temptation to invest your emergency money will be back. So let's go through the thinking now, so then we can look back on it.
Often, our personal emergencies are caused by circumstances outside our control. And often, our personal emergencies occur at a time when we aren't the only one having an emergency.
If your hot water heater croaks while the market is on a tear, no big deal. If the market is up from when you put money in, you can take money out without a problem (except transaction costs and taxes, but let's ignore that for now).
The catch is that often your personal emergencies will tie to larger emergencies in the world around us. If something happens (oh, say, a pandemic) the markets will fall, businesses will fail, and jobs will be lost. If this is your emergency, sure, you can still pull your cash out and use it for your living expenses, but you will be pulling cash out of the market at the worst possible time. Remember the rule to buy low and sell high?
The truth is most people do exactly the opposite. When the market is trending upward, they hear how well everyone is doing and they want in. When the market is crashing down, they panic and want out.
Do yourself a favor and keep some cash in savings for emergencies so you can access it without taking a loss on your investments, ok?
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