Thursday, November 30, 2006

Emergency Fund - true emergency or investment money?

People say you should have 3-6 months in cash in an account in case of emergency. But what if you decide to invest this money instead and only pull it in time of dire emergency? Say emergency surgery, death, or job loss? What is the likelyhood that you would ever need to touch this money? Low? High?

If that were the case would it be wiser to invest this lump sum of money? For us the 6 month EF would probably be around $30k, which is no chump change. Thus I've decided to invest our EF. For a few reasons, the least of which is it's too much cash to just be sitting there.

One good compromise is that we save quite a bit into an ESPP so if we should need it we could cash in some stock. Another reason to invest, is that I don't consider my EF a catch all account for emergencies. I believe that our EF is only to be used in dire circumstances. All other expenses should be saved for in advance or something in our budget must be cut to accomadate the new need. This is not a permenant change necessarily but a temporary one.

So I would do everything in my power to cash flow any expenses and keep a large enough pot of money that I wouldn't have to pull it out of my EF. What do most people do? Do they keep their EF liquid in a savings account or CD? And under what circumstances would they use their EF?

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