A financial planner explains the 5 things everyone gets wrong about emergency funds

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Being prepared for emergencies is an essential part of sound financial planning.

I typically advise my clients to keep three to six months of basic living expenses — such as their rent or mortgage payments, groceries and child care costs — set aside in their checking or savings accounts. This helps them avoid resorting to credit cards to cover unexpected bills.

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But I find my clients still have questions about how to manage emergency funds and balance them with investments.

Here are five emergency fund myths I'd like to debunk.

Myth No. 1: If I want to grow my emergency fund, I should put it in investments

Truth: Your emergency fund and your investments are different accounts with different goals.

Your emergency fund should be cash you can access easily, whereas your investments should be growing for the long term. Tapping them early can lead to problems. For example, you'll lose out if you have to withdraw money during a downturn, while long-term investors can gain their money back and then some when markets recover. And no matter when you withdraw, you'll lose the money's potential for long-term growth. You might also pay penalties if your early withdrawal is from a qualified retirement account, such as a 401(k).

You can easily see the risk of using your investment accounts as an emergency fund if you look at recent history. Just think if you'd lost your job in 2008, as the stock market was crashing — causing your emergency fund to lose 30% or 40%.

Retirees who live on their investments are the one exception to this. But they still need a well-thought-out strategy to ensure that their distributions and cash flow are sustainable.

Myth No. 2: I should save as much as I possibly can in my emergency fund

Truth: Maximizing your emergency fund can be a missed opportunity to grow your net worth.

Right now, interest on savings accounts is close to zero. The national average APR for a normal savings account is 0.5%, and high-yield savings accounts and money markets yield between 0.75% and 1%.

Let's say you started with $10,000. After 10 years, you'd have $16,665 if you put that money in a normal savings account, $17,368 if you put it in a high-yield savings account, or $28,272 if you put it in an investment account and earned about 7% each year — that's more than double the original investment.

Keeping too much cash is counterproductive in our low-rate environment. Be efficient and keep the right amount of cash in the right types of accounts.

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Myth No. 3: I need to save three to six months of my current level of spending

Truth: Save three to six months of basic expenses to avoid having an unnecessarily high level of reserves.

To determine how much you should have in your emergency fund, identify your "core expenses," which represent the amount you absolutely need to live on without going into additional debt. You don't need to include discretionary spending — such as cash for hobbies, spa treatments or vacations — in this figure.