With some of the cheap ASX shares we're seeing right now, you may be wondering if you should invest your emergency fund. The S&P/ASX 200 Index (ASX: XJO) has slumped 24.12% lower since the start of the year to 5,076.80 points (at the time of writing). That means some of Australia's biggest companies could be in the buy zone right now if you're willing to invest your emergency fund.
What is an emergency fund?
Before you invest your emergency fund, let's run over exactly what it is.
I like to think of an emergency fund as a rainy day fund. Stocking away money when times are good can mean you've got a cash buffer for a downturn. The coronavirus pandemic has meant that thousands of Aussies have had their hours reduced or jobs cut completely. Many industries have been hit hard including travel, hospitality and entertainment among many others.
If you've saved an emergency fund over the years, you're probably feeling pretty good at the moment. The security that having that cash can bring can help to reduce your financial stress. But with a number of ASX 200 shares in the bargain bin right now, should you invest your emergency fund?
Should you invest it in ASX 200 shares?
Before you dive in and invest, it's important to consider risk and return. With ASX 200 shares looking cheap at the moment, I think there is plenty of long-term return on offer. If you're a buy and hold investor for the long-term, buying shares should yield a better return than just holding cash.
However, the point of an emergency fund is as a backup. The emergency fund is for times exactly like these with more economic uncertainty and the chance of job losses. If your job could potentially be at risk and you have bills to pay, you not want to invest your emergency fund in ASX 200 shares.
But if you're willing to take on extra risk, that decision could pay dividends over the coming decades.
