Emergency Fund - Invest?

[JimNasium]

A common wisdom is to have 3 - 6 months of expenses as an emergency fund, in case something comes up. I’m curious what peoples thoughts are of putting the money into a mutual fund rather than keeping it as cash in an extremely low savings account. I feel like if something did come up and I needed the emergency money immediately I could just put it on my credit card and then pay it off normally once I’ve cashed out my mutual fund. Having even lets say 500,000 in a mutual fund at 5% would earn an extra 141,000 in five years. Any thoughts on this?

[Established]

A common wisdom is to have 3 - 6 months of expenses as an emergency fund, in case something comes up. I’m curious what peoples thoughts are of putting the money into a mutual fund rather than keeping it as cash in an extremely low savings account. I feel like if something did come up and I needed the emergency money immediately I could just put it on my credit card and then pay it off normally once I’ve cashed out my mutual fund. Having even lets say 500,000 in a mutual fund at 5% would earn an extra 141,000 in five years. Any thoughts on this?

That would not be an emergency fund then. Emergency funds are in a zero-risk position and immediately accessible. That would simply be a typical investment...

If you took out a cash advance on your card you would be paying between 15-25% monthly interest. That is a horrendous approach to emergency finance.

[pfdsa]

Agree with what Established said.
To give you an example, last year I lost my job and was unemployed during 3 months. Due to various circumstances ended up moving all the way from the south of Japan to the north. That surely didn’t came out cheap, and literally emptied my whole emergency fund. Since you never know what will happen tomorrow (both good and bad things), I would keep that emergency fund in a regular bank account and just forget that I even have it.

[adamu]

There seem to be two camps with this. I'm in the cash camp. I don't see it as wasteful, because the cost (devaluation of the savings) is worth paying for the peace of mind to put the rest of your investments to good use. It's like insurance. You hope you never need it, but you pay for it anyway just in case, and it's there if you do.

Relying on credit isn't going to work in a credit crunch. Nor if you lose your job and your card company finds out.

You could say that the emergency fund isn't even necessary if you have enough investments. Even at a loss, an emergency is an emergency, so you can just take the hit and sell some of your investments. But personally I wouldn't want the stress of having to take a loss on my investments at the same time as dealing with whatever caused the emergency.

[RetireJapan]

My wife and I have a fairly large cash pile -almost 10% of our net worth. This is mainly because my wife runs a small business, and we want to have at least 3 months' worth of expenses on hand.

I've never regretted this allocation, certainly not when Covid first hit last year and we didn't know how it was going to play out.

Also it is nice to be in a situation where sudden expenses don't phase you -a minor car accident, losing a job, an emergency trip abroad. Not having to think about it in terms of the money reduces a lot of the stress in those stressful situations.

[JimNasium]

If you took out a cash advance on your card you would be paying between 15-25% monthly interest. That is a horrendous approach to emergency finance.

Ah, I wasn’t talking about a cash advance. I meant just paying for whatever the “emergency” is with my credit card, then paying it off normally.

[JimNasium]

Agree with what Established said.
To give you an example, last year I lost my job and was unemployed during 3 months. Due to various circumstances ended up moving all the way from the south of Japan to the north. That surely didn’t came out cheap, and literally emptied my whole emergency fund. Since you never know what will happen tomorrow (both good and bad things), I would keep that emergency fund in a regular bank account and just forget that I even have it.

But if your emergency fund was in a mutual fund couldn’t you have cashed it out when you needed it? I know it takes some time for the funds to be sent to your account, but it surely wouldn’t be an extremely long time. If you had to pay for something between then just charge it normally on a credit card then pay it off once your funds are received.

[Established]

If you took out a cash advance on your card you would be paying between 15-25% monthly interest. That is a horrendous approach to emergency finance.

Ah, I wasn’t talking about a cash advance. I meant just paying for whatever the “emergency” is with my credit card, then paying it off normally.

That is not a plan for an emergency. You are postponing payment by 30 days or less. Creating more debt and risk.

How would this help you if you lost your job or had to pay a sudden large bill?

You need to ask yourself, "Am I prepared for an emergency".

How long could I survive if I lost my job, had a sudden serious expense, or sudden illness.

I recommend at least 6 months' expenses in cash or cash-like holding. There are fewer options in Japan, but term deposits are decent alternatives overseas.

But if your emergency fund was in a mutual fund couldn’t you have cashed it out when you needed it? I know it takes some time for the funds to be sent to your account, but it surely wouldn’t be an extremely long time. If you had to pay for something between then just charge it normally on a credit card then pay it off once your funds are received.

Many people did this in March 2020. Their investments were cut in half, and they had to draw from them. If they only waited 6 months those investments would have recovered.

We will not always be in a bull market. In a bear market, this strategy could cost you a substantial portion of your saving, which would rebound eventually if left alone.

This is why you have an emergency fund.

[JimNasium]

Nor if you lose your job and your card company finds out.

Ohh, I didn’t know banks could revoke cards for that. Interesting.

[JimNasium]

Many people did this in March 2020. Their investments were cut in half, and they had to draw from them. If they only waited 6 months those investments would have recovered.

We will not always be in a bull market. In a bear market, this strategy could cost you a substantial portion of your saving, which would rebound eventually if left alone.

This is why you have an emergency fund.

Yeah, this is my only worry here. Thanks for your replies. I really appreciate it!