emergency fund

i was reading a forum the other day where a lot of people were advocating keeping an emergency fund in stocks! they even had elaborate mechanisms to make sure that they would be able to stop losses. i can't say how bad an idea i think this is.

for one, an emergency fund should not be thought of as an investment vehicle. it is a pile of money that is ready so that it can be tapped into in the event of a big surprise -- loss of income or some such.

additionally, your emergency fund should be at little to no risk and be extremely liquid. now, i find that all of my stock holdings are pretty liquid, but you never know if you end up buying into a low volume stock or if a some sort of trading block happens on your stock the day you need it.

if you keep your emergency fund in a stock or stocks, you have a few issues that you have to contend with. one is that your ef may be very volatile. how can you bank 6-12 months of expenses in something that you don't know the value of day-over-day? the other thing is that if something should befall you, you stand to lose a substantial bit of money, if you have to break into your fund on a down day. even if you have standing stop loss orders in place, you bear the burden of commission charges and -- more importantly -- you have to determine another stock or set of stocks to put your money.

i keep about 1/2 of our emergency fund in cash in a checking account. the other 1/2 is in staggered 1 year cd's that mature each month and renew if i don't need them. it's valued at about 12 months of family expenses, but i'm sure that if we found ourselves suddenly unemployed, we could actually stretch that to 20-24 months.

i've heard people say that credit is good enough to use for an emergency fund. i've actually used that tactic, with extended 0% financing, but i disagree that a credit card should be used for that role, as it really only buys you about 1 month and then it's time to pay the piper.