Suze Orman Says You Shouldn't Invest Money That Falls Into This Category

It's advice worth heeding.

You'll often hear that if you want to be wealthy, your best bet is to put money you're not using to work by investing it. In fact, financial guru Suze Orman is a big proponent of investing. She often tells people to not only put money into quality assets, but to aim to hold those assets for a long time.

But while investing is definitely a key wealth-building tool, there are certain funds of yours you don't want to invest. In fact, in a recent podcast episode, Orman cautioned listeners against investing money that falls into one specific category.

Be careful with the funds you invest

If you have money you don't expect to need for many years, then it absolutely pays to put that money to work by investing it. But Orman says one thing you don't want to do is invest money you might need within a year.

So, let's say you're saving up to buy a home and think it might take another 12 months to finish accumulating enough funds for a down payment. You may be tempted to stick your existing down payment funds into a brokerage account and see if you can snag a higher return on that cash than what you're getting in your savings account. But that's a bad idea.

Similarly, you might have money you've saved up as your emergency fund. While you're not guaranteed to need that money within a year, you could end up needing it within a year if something goes wrong, whether it relates to your home, your car, your health, or your job. So that's money you should also avoid investing.

Why does Orman insist on this rule? It's simple.

The stock market is known to be volatile. In fact, a lot of people are now seeing lower brokerage account and IRA account balances than they had at the start of the year due to broad market turbulence.

If you're investing on a long-term basis, situations like this don't have to be stressful, because if you don't go off and sell assets at a lower price than what you paid for them, you won't lose any money. But if you're looking at a one-year window, you may be forced to take a loss on investments to free up your money.

So, let's say you have $15,000 earmarked for emergency bills. If you put that $15,000 into a brokerage account, it might only be worth $13,000 six months later.

But what if you then encounter a major home repair that will cost $15,000 to address? If you have to liquidate your brokerage account when its value is down, you'll lock in a $2,000 loss. And that's really not what you want.

It's okay to leave some money in savings

You might earn two, three, or four times the return on your money in a brokerage account than in a savings account. But in a savings account, your principal is protected, whereas invested assets can lose value at any time.

That's why it's essential to stick to Orman's rule and not invest money you need, or might need, within a year. You're better off accepting a lower return on that cash than running the risk of losing a large chunk of it.