Emergency Fund or Invest? Which To Do First
When it comes to handling finances, figuring out where to start can be tricky. Should you save cash for emergencies or put your money into investments to grow?
Having an emergency fund means you have money saved in a regular savings account just in case something goes wrong and you need to easily access your money. This can help you avoid going into debt when surprises come up. On the other hand, investing your money can help it grow more compared to keeping it in a savings account.
In this article, we’ll go over why it’s good to have an emergency fund, the basics of investing, how to manage both saving and investing, and what issues you might run into. We’ll also suggest ways to deal with these problems and share some tools and tips for keeping track of your money.
Our goal is to help you make smart choices with your finances that fit what you want for your future.
The role of an emergency fund
Think of an emergency fund as a safety cushion for your finances. It’s money you save that should only be used for unexpected expenses that you didn’t see coming, like if your car breaks down, you receive an unexpected bill, or you get sick and need to cover your living expenses. The main goal of having this fund is to make sure you can handle financial surprises without having to borrow money or sell something important to you.
Why it’s great to have one
Having this safety net has a few benefits. First, it gives you a sense of security. Knowing you have money set aside for unexpected expenses can make you feel more relaxed and less worried about what could go wrong. It also means that when unexpected costs pop up, you can cover them without stressing about finding the money or going into debt.
Another big plus is that it keeps you protected from sudden expenses. Whether it’s fixing your home or dealing with a medical emergency, you’ll be ready. And since you’re prepared, you won’t have to change how you normally spend or save your money because of an emergency.
How much should be in your emergency fund?
So, how much emergency funds should you save? A good rule is to save enough to cover your living costs for three to six months. But this isn’t a one-size-fits-all answer. It depends on a few things:
- How stable your job is: If your job isn’t very stable, you might want to save more, just in case.
- How many people earn money in your home: Having a bigger emergency fund can be a good idea if you’re the only one.
- Your monthly expenses: The more you have to pay every month, the bigger your emergency fund should be.
- How comfortable you are with risk: Some people are okay with saving less, while others might sleep better knowing they have more saved up.
Understanding investing basics
Investing means putting your money into things like companies, real estate, or products because you want your money to grow over time. The idea behind investing is to make more money, helping you reach your bigger dreams like retiring comfortably, buying a house, or saving for your child’s education. Instead of just keeping your money in a savings account where it grows slower, investing gives it a chance to increase much more, although it comes with some risks. By understanding the different ways to invest and starting as soon as possible, you take advantage of growing your money over time, helping you reach your financial goals.
Types of investments
Stocks, bonds, exchange-traded funds (ETFs) and mutual funds are a few common ways people invest their money. Each way of investing has its own balance of risks and possible rewards.
Stocks
Buying a stock is like buying a tiny part of a company. If the company does well, your piece of the company becomes more valuable, and you could make money. But you might lose money if the company doesn’t do well.
Bonds
When you buy a bond, you’re lending money to a government or a company. They promise to pay you back plus a little extra after some time. Bonds are usually safer than stocks but don’t make as much money.
Mutual funds
This is when your money gets pooled together with other people’s money to buy a mix of stocks, bonds, or other investments. A professional manages it. This spreads out the risk because you’re not putting all your eggs in one basket, but there are fees for managing the fund.
ETFs (exchange-traded funds)
ETFs are kind of like mutual funds, but you can buy and sell them on the stock market just like stocks. They let you invest in many different things at once, which can help manage risk.
Benefits of investing early
The sooner you start investing, the better, because of something called compounding interest. This is where you make money on your investments, and then that money is added to the original amount and makes more money, and so on. Over time, this can really add up, making your money grow way more than if you started later in life.
Starting early also means you have more time to ride out the ups and downs of the market. Even though the value of investments can jump around in the short term, they tend to go up over the long term. Investing early gives your money more time to grow and bounce back from any lows, which can lead to bigger gains.
Finding the right mix between saving for emergencies and investing
Getting the right balance between emergency savings and investing depends on looking at your current financial situation, understanding what you’re comfortable with, and planning for both short-term needs and long-term goals. Here’s how to do it:
Assess your financial situation
Take a look at where you stand with your finances. First, think about how regular your paycheque is. If your income is all over the place, you might need to save up a bit more just to be safe. Next, check out how much debt you have, especially the kind with high interest, like credit card debt. This kind of debt can make it tough to save money and invest it. Lastly, see if you’ve got some money saved up already. If you have a little nest egg, you might be ready to start putting more money into investments.
How to balance your money
First, figure out how comfortable you are with risk. If the thought of losing money makes you nervous, you might want to save more before you invest. Next, figure out what it is that you’re saving up for. Short-term goals might work better with a savings account (i.e., high-yield savings accounts), while you can invest money you won’t need for a long time. Finally, determine whether you’ll need to access your money earlier rather than later. Money for far-off goals can be invested to grow, while money you’ll need soon should be saved.
Decide where to put your money first
It’s smart to build up your emergency fund before investing heavily. Common advice is to save enough to cover three to six months of your bills. Once you hit that goal, you can start investing more money. This means you’re not stopping your emergency savings; you’re just focusing more on growing your money for the future.
Should you invest your emergency fund?
It might seem like a good idea to invest your emergency fund to help it grow, but it’s usually not the best move. Emergency money should be easy to access, like with a high-interest savings account. It may take longer to withdraw money held in investments. Plus, investments can go up and down in value. You might lose money if the market is down and you need to withdraw money from your emergency fund. Remember, the main job of your emergency fund is to be there when you need it. Keeping it in a safe and easy-to-reach place means it’s ready whenever you need it.
Common financial challenges and solutions
Dealing with tight budgets and getting past mental blocks can be tricky, but there are ways to work through these problems:
When money is tight
It can be tough figuring out how to split your limited cash between saving and investing. Start by taking a close look at your spending. Focus on what you really need to spend money on and look for cheaper options for the rest. You might even find things you’re spending on that are unnecessary expenses. Cutting back on these can free up more money for saving or investing.
Also, think about ways to make some extra money on the side. This could be a part-time job, freelance work, or even making money from a hobby. Extra money means you can boost your savings and investment funds.
Breaking through mental blocks
Sometimes, what stops us isn’t just the money—it’s in our heads. Here are two common mental hurdles:
Fear of losing money
It’s normal to be scared of losing money in investments. Learning more about investing and starting with safer options can help ease this fear. Investing is usually more about the long haul, where patience pays off.
Thinking you need a lot to start investing
Some people think you need a ton of money to begin investing, but that’s not true. Nowadays, there are lots of ways to start investing with just a little bit of money. This makes it easier for anyone to get into investing without needing a big pile of cash first.
Tools and resources for managing your finances
Keeping track of your finances and making smart choices can be easier with some helpful tools and knowing when to ask for advice.
Financial planning tools
Consider using apps like YNAB (You Need A Budget) and PocketGuard to see where your money goes and find ways to save. And for a simple way to watch what you spend, try apps like Expensify and Wally, which are especially handy for people who work for themselves or have their own small businesses.
Many financial institutions offer their own financial planning tools as well. Take Neo Insights, for example. Insights simplifies tracking spending and eliminates the hassle of building a budget every month. With Insights, you become the expert in what, when, and where you spend, with instant spending breakdowns by time period, category and transaction. Plus, with Neo’s built-in AI, you can get to know your financial habits like never before.
When to get expert advice
Sometimes, you need more help than what an app can offer. It’s good to talk to a financial advisor when:
- You have financial situations like owning a business, dealing with family financial issues, or paying off a lot of debt.
- You’re looking to make more serious investment moves or have a lot of money to invest.
- Big events like getting married, having a baby, or planning for retirement can really change what you need from your money.
Recap: Should You Build an Emergency Fund or Invest
Having an emergency fund and putting money into investments are both important for saving money and helping your money grow. You don’t have to choose one over the other; you can work on both at the same time. Think of it as setting up a safety net with your emergency fund while also planting seeds for your future with investments.
Start small with what you can manage and build up from there. This way, you’re taking steps to protect yourself for today and also planning ahead for tomorrow. Start today by taking the first steps toward saving and investing.
