Emergency Fund

[StanleyJohnson]

Once we get our 6 month emergency fund in place, we would like to take part of it and buy a local utility company's stock.
Our money market is paying 1.1% and the utility is paying a 4% dividend.
Is this an acceptable place to park part of an emergency fund?

[mek42]

Once we get our 6 month emergency fund in place, we would like to take part of it and buy a local utility company's stock.
Our money market is paying 1.1% and the utility is paying a 4% dividend.
Is this an acceptable place to park part of an emergency fund?

In my opinion, no. First, the emergency fund is a source of liquid cash, not an investment. As such, if needed, it is ok to add to the EF as time goes on to account for inflation and changes in expenses - the EF itself does not need to do so. Also, as your house is more in order, there may be some areas where your frugal sacrifices change - it is perfectly ok to add these greater expenses to the fully funded EF.

When you say "money market" do you mean money market savings account through your bank, money market mutual fund through your bank or money market mutual fund on the open market?

You should be able to find a money market mutual fund on the open market that meets or exceeds the dividend of the utility stock you mention, without nearly as much risk of capital loss.

If you go with a money market mutual fund on the open market, the funds may be liquid, but not immediately available (i.e. it may take two - three business days to get the money). In this case, it would be good to keep a baby EF (still around $1,000) in a seperate easily accessible bank savings or checking account for minor emergencies that need cash right now.

An example would be, I have a flat tire I need to quickly replace before going to work today.

[Ceashels]

I agree with Mek.

An emergency fund needs to be liquid. If you can't have access to the money within a day.... it isn't an emergency fund - it is an investment. DR realizes that temptation to invest the EF but don't cave into the higher percentages.

It took me weeks to get my money out of Constellation Energy Corp (local Baltimore Gas and Electric). If it had needed it for an emergency - I would have been screwed.

[Greebo]

An emergency fund is not an investment, it is insurance.

Investments make money. Insurance you pay money to avoid risk.

In this case, you pay the lost value due to inflation to avoid the risk of having to go into debt in the event of an emergency.

A 4% dividend is worthless if the stock goes down 10%, after all.

[frugalwarrior2]

Can you find a better money market mix instead. 25% international,25% growth,growth/income,25% aggressive growth is what D.Ramsey recommends. Bear in mind your age plays a factor too. Investing in a single stock is not recommended. He uses the all your eggs in one basket example. Diversification instead so then when 1 thing is down you will still (hopefully) be growing in other areas. Bear in mind also you want a 5 year picture in your head. His blend was 15% in 401K up to match,Roth Ira (2008 was $5000. each spouse-call for max now) maxxed,then 401K for non-match. Works out as $100,000 income-15%=$15,000 split $3000. 401K match, $10,000 (w/ spouse) and $2000. non match. Per year. Hope this was clear.

MY bad,read you wrong. Thought you already had liquid savings.

[StanleyJohnson]

Thanks everyone for the advice.
I was on the fence on that one, but have decided to go with the group and just leave the money in a money market account.