Being broke is expensive. Overdraft fees, payday loans, credit card interest and other financial pitfalls make being broke a difficult trap to get out of. And once you do break the cycle, you want to be sure not to fall back into the trap. That’s where an emergency fund comes in. If investing is your financial “offense”, the way to build wealth, your emergency fund is part of your financial defense. You can’t build wealth if you get stuck in the broke trap.
I’ve always recommended keeping your emergency fund in cash. Many new investors who see that big chunk of change sitting there in a “high yield” savings account getting about 0% interest feel there’s a missed opportunity. They often ask me, “should I be investing this?!”. And my answer is always no. We don’t know what the market is going to do over the upcoming days, weeks, months or even a year or two. And at any time you may need to access that cash for its intended purpose. You don’t want it to go down by 50% right before you need it.
I know it feels like it could be working for you, but just remember that it is. Just like paying a small insurance premium to protect you from a big bad thing happening, leaving your emergency fund in cash is paying a small cost (in missed growth) to protect from the big bad thing happening (getting stuck in the broke trap).
So get out of debt, build an emergency fund, then start dumping all the additional money into investments. That’s how you get rich.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.