real money growth

emergency fund: how much and where to put it?


An emergency fund is a necessity, but how much do you really need? I’ve read many articles about this topic, and the answer seems to be enough to cover 3-9 months living expenses - rent, car payment, groceries, cell phone, etc. For some, this may be $5,000, and for others, it may be $20,000. It really depends on your lifestyle. I think that most people see the emergency fund as a binary value; you either have the money cash or you don’t.

The money that I need to have access to quickly, and keep very safe - low risk - I place in a high yield savings account. I also keep some funds in no-penalty CDs which earn a little higher rate than the high yield savings account. I can pull the money out of the CD account at any time without paying fees.

The funds in my high yield savings account only cover about 4-5 months living expenses. If I drain these resources in an emergency, I would then turn to my Roth IRA for funds. Most of the time, you will not know the exact amount required to get through your emergency. The emergency may grow over time and require you to spend more money than you initially thought.

My technique/strategy in case of an emergency:

1) Drain my high yield savings and CD accounts

2) Look to my Roth IRA as I will not pay any fees or penalties to withdraw from this account

3) Pull from pretax contribution accounts such as my 401K and Traditional IRA - hope that it doesn’t come to this.

The goal of splitting your emergency fund up, as described above, is so that you can keep as much as you can invested. My high yield savings account is the lowest risk account I have; the return on this account is also the lowest. My Roth IRA account is invested very conservatively, but it does yield higher returns than my high yield savings account. My Traditional IRA and 401K are invested very aggressively, and the return is the highest. This emergency fund technique, to me, is much more logical than setting a large sum of money aside in one savings account - not invested - for an emergency that may never happen.