One of the central tenets to good financial planning is preparing for the future, whatever it may bring. Therefore, an essential component of a solid financial plan is an emergency fund.
An emergency fund is designed to cover a financial shortfall when an unexpected expense crops up. Your emergency fund can serve as a place to get the money you need when you find yourself short. Because it must be reliable, it needs to hold guaranteed investments. In other words, savings accounts are good for emergency funds, while stocks are bad.
An emergency fund, by nature, also needs to hold liquid or otherwise short-term, accessible investments. Ideally, you won’t need to use the money in your emergency fund, and you will maintain it for the long-term. However, this creates an interesting conundrum: a long-term account holding short-term, low-interest bearing investments.