A:

An emergency fund is very handy when unplanned and unexpected expenses arise. It is always advisable to have some money tucked away for a rainy day, as an emergency fund can supplement any temporarily foregone income or can be used for an infrequent/unexpected purchase. Usually, financial experts advise that an emergency fund should be able to cover three to six months of living expenses. Emergency funds should not be invested in risky places like the stock market, and should instead be focused on high quality liquid fixed income securities or money market investments. The purpose of an emergency fund is to have money in case of an unplanned event such as a layoff or unforeseen medical expenses. The volatility of the stock market makes it a very risky option and also makes it impossible to guarantee that you will have sufficient funds if there is an emergency.

Emergency funds serve as a safety net where one can afford to pay for living necessities that cannot be obtained through current income sources. It is advisable to place emergency funds in a fairly liquid interest earning investment option. In other words, in the case of an emergency, you should be able to access the fund quickly and inexpensively. This means that you want to pick investment options that do not charge high fees or have inexpensive "early withdrawal" fees. This rules out long-term investment options (because of the time period) or mutual funds (because of the fees and risk involved). The most popular options for emergency funds are savings accounts and short-term certificates of deposit.

For tips on how to build an emergency fund please read Build Yourself An Emergency Fund.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. How much money should I have in a savings account?

    Read a brief outline of the purpose of savings accounts, emergency funds and how to determine how much money to store for ... Read Answer >>
  2. How much of my total assets should I be keeping in my money market account?

    Investing a portion of total assets in a cash position such as a money market account provides investors access to funds ... Read Answer >>
  3. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  4. I have $15,000 to invest. What should I do?

    Should I put the money into a CD.  ... Read Answer >>
  5. What typically comprises a money market fund?

    Learn about the basic types of money market funds and discover how they are characterized by the types of investments that ... Read Answer >>
  6. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
Related Articles
  1. Budgeting

    Building An Emergency Fund

    An emergency fund can mean the difference between tough times and a total financial disaster. Find out how an emergency fund works and why you need one now.
  2. Investing

    Why You May Not Need an Emergency Fund

    Emergency funds are considered mandatory by most financial-planning experts, but they can be expensive to hold and ultimately unnecessary.
  3. Savings

    Why Emergency Funds Are A Bad Idea

    Learn why taking the time to build an emergency fund is a staggeringly inefficient use of the precious and limited resource that is your money.
  4. Savings

    Why Emergency Funds Are A Bad Idea

    Building an emergency fund is common financial advice. But there are times when it’s not the most prudent move to make.
  5. Mutual Funds & ETFs

    Time to Add Emerging Markets to Your Portfolio?

    Now that emerging markets are out of favor, is it time to add them to your portfolio?
  6. Mutual Funds & ETFs

    3 Emerging Markets Equity Mutual Funds for Bull & Bear Markets

    Discover three strong emerging markets mutual funds suitable for investors willing to accept a higher degree of risk and volatility.
  7. Mutual Funds & ETFs

    3 Emerging Markets Equity Mutual Funds to Avoid in 2016 (TPECX, PCEFX)

    Learn about how emerging market stocks have fared in 2016, where developing stocks could be heading, and three emerging market mutual funds to avoid in 2016.
  8. Savings

    Emergency Funds That Are Right For Your Tax Bracket

    How much you need to sock away depends on how much money you'll need down the road.
  9. Mutual Funds & ETFs

    The 3 Best ETFs to Short Emerging Markets Equities (EUM, EEM)

    Discover the emerging markets equity asset class, and learn about three different ETFs you can use to get varying amounts of short exposure to it.
  10. Mutual Funds & ETFs

    3 Best Dividend-Paying Emerging Markets Equity Mutual Funds (VEIEX, EMBIX)

    Learn about emerging markets and how your portfolio can benefit from them. Discover three unique high-dividend-paying emerging market mutual funds.
RELATED TERMS
  1. Emergency Fund

    An account that is used to set aside funds to be used in an emergency, ...
  2. Emerging Market ETF

    An exchange-traded fund that focuses on the stocks of emerging ...
  3. Fund Of Funds

    A mutual fund that invests in other mutual funds. This method ...
  4. Money Market Fund

    An investment fund that holds the objective to earn interest ...
  5. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  6. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center