What if an emergency arises and I need to get my money out of my stocks. Can I do so easily?

The answer to this question is: it depends. Stocks are naturally meant to be cashed in. But take the event that occurred on September 11, 2001. This terrorist attack leads to the closing of the stock market for four days. No money went in and no money could come out. In this kind of emergency, no one could get their money out of stocks. Of course the stock market does not close, holding your assets hostage, every day. In fact, there has only been one other time in 1933 that such a shut down happened. Terrorists' attacks and national financial shut-downs are one type of emergency. But what if you need to get your money out of stocks to make a payment on your house? This all depends on what is called liquidity.

The term "liquid" refers to how fast and easily your investments can be turned into cash. For example, the dollar bill in your pocket is as liquid as money gets. You have it and can use it right this second. But you know that there is no way to earn interest or any kind of returns by keeping your money in your pockets. So what do you do?

Diversify your investments - When you are deciding on how to invest your money, plan on diversifying your investments. It is a good idea to invest in both low risk and high risk stocks but also consider the time frames associated with your investments. For example, a savings account is a low risk account because there is no minimum holding fee. You are free to access that money whenever you wish. Certificates of deposit on the other hand are help for a certain period. You agree that in exchange for lending the bank your money for a set period of time you will receive a higher interest rate. In the case of loosing money your risk is extremely low, but in the case of being able to access your money quickly your liquidity is greatly diminished. Also consider the use of real estate as a liquid asset. Real estate can increase in value sometimes more quickly than stocks can but real estate can take months and even years to liquidate.

The point is that you should not use stocks as an emergency fund, but that is not to say that investing in stocks is dangerous if you need to liquidate your assets quickly. You should have other more immediate means for getting your money (ex. Checking and savings account) that can sustain your needs while you wait for your stock investments to liquidate. Remember also that stock investments are generally meant to be long-term if you want to see any kind of significant return. Constantly pulling your stock investments because of emergencies doesn't make any sense.

Plan ahead for emergencies - Remember that in the case of a larger scale emergency (one that reaches beyond the walls of your own house) banks, credit unions and the stock market are not good places to have your emergency funds. These places can close and in doing do hold any and all funds therein hostage. In the case of emergency you can get your money out of stocks but it is most likely going to take some time. Depending on your emergency, you may not be able to wait for the days it will take to cash out on your stocks.

Instead you should have a highly liquid (cash) reserve in case of emergencies. Experts say that this reserve should be at lease enough to sustain you and your family for 1 month, but ideally you should have enough safely tucked away for 6 months. The exact amount you should have will vary depending on your estimated monthly expenses.

Getting money out of your stocks is relatively easy. It can be as simple as making a phone call to your broker. But in the case of a real emergency, your broker may not be available or even worse; the stock market could be closed for business. This is why stocks are not a good place to keep your emergency funds. When the situation is right you can liquidate them without hassle, but sometimes you will not have time to wait.