Tuesday, October 6, 2009

Don't Invest Your Emergency Reserves

We recently read this article and felt it was worthy of comment. We think the author is quite simply providing BAD ADVICE! Emergency reserves are just that, money that should be available in case of emergency and not tied up in a relatively risky investment like stocks. Now we like dividend stocks as well (if not better) than the next guy, but they should only should be used for your investment portfolio, not for money that you could require in case of emergency. If you had followed the author’s advice last year, your reserve could have declined by 20-30%, at a time when you may have really needed the money.

Bottom line, keep your emergency funds in a very low risk and easily accessible place like a bank account, money market fund or very short term CDs. The interest you earn will be very low, but the money will be there when you need it. Emergency funds are about return of principal, not return on principal.