Some other financial advisors do recommend similar approaches to emergency funds, such as investing in bond funds or using a Roth IRA, which allows you to withdraw contributions without tax penalties. All strategies involve taking more investment risk to earn better returns than liquid cash holdings. Depending on how an emergency fund is invested, you may also have to pay capital gains taxes when your fund's investments are liquidated to cover unforeseen expenses.
To be sure, such investments aren't as easy to convert to cash as a traditional savings account at a bank. At Betterment, it can take three to four days to liquidate a portfolio.
But how many emergencies require cash instantly? Egan said he used a credit card to cover the cost of a car accident a year ago and then paid off the balance with his emergency fund before interest could accrue.
Of course, that strategy only works if you have enough in your fund to cover such expenses.
Building an emergency fund is the No. 1 priority among the 5,500 U.S. households annually surveyed by Hearts & Wallets, said Laura Varas, principal of the retirement market research firm. Yet many Americans still aren't setting enough aside. Six in 10 Americans said they don't have enough in an emergency fund to deal with even minor expenses.
While advisors may disagree on whether to invest the money in the fund or leave it in a bank account, they do agree on this: The most important thing is to have an emergency fund, and one with enough money to cover your needs.