Giving the Middle-Finger to My Emergency Fund

I am a big proponent of having an emergency fund. In fact, one of my medium term goals is to have a $10,000 emergency fund (about 4.5 months of living expenses). So you may be surprised to hear that I recently took $4,000 out of my emergency fund (balance was at $6,200 at the time) and used it in a way that I feel is much more productive.

Where did it go?

That $4,000 went right into my Roth IRA. With my goal of maxing my 401(k) for the year, I knew it was going to be tough to max the Roth in 2010. However, I know that these early years are the most important for the growth of my Roth. Somehow, someway, I was determined to make sure I was able to contribute the full $5,000 for the year.

With both retirement accounts getting maxed for the year, I know my investment accounts are going to grow at a faster pace than I could have ever hoped. A little bit of sacrifice now (and it really is only a little bit) will set me up for that boat and house on the beach that J. Money and I always talk about for our early 40s.

What happens if an emergency occurs?

Well I am glad you asked. I still have an emergency fund of about $2500. So, I am covered for at least a little bit. I also have additional cash savings (set up for specifics savings goals) that I can spend if I am really in a tight spot. There is also a $1500 cash buffer that I keep in my checking account. All in all, I am at about the same place I was cash wise prior to the $4K being yanked out.

You then ask, what happens if I burn through all of that cash?  Well I am glad you asked, because that was a legit concern of mine as well. I consulted with a financial advisor (someone who is 30 years my senior and specializes in retirement accounts including the Roth IRA) and found out an interesting aspect to Roth’s. Now, we already know you can take out your principle investments at any time without penalty. We also know you can’t put that money back in until the next tax year if you have already maxed your contribution for the year. BUT, you CAN take out principle funds from your Roth for a maximum of 60 days and return them in full without penalty once over the course of a year. If you return the funds within those 60 days, it’s like it never happened.

This was all the reasoning I needed to make that jump.  If I can have a 60 day loan from my Roth with no stipulations, I know all my financial bases are covered.

Why did I do it?

Well, I explained what I would do if an emergency occurred above, but that doesn’t get to the fundamental logic for me making this bold move. While I embrace an emergency fund, I do so begrudgingly.

Cash is cash, and having ample cash reserves is important. Does it matter if it’s in an ING sub account labeled as “emergency fund”?

While having that $10,000 e-fund is important to me, it is only a mid-level priority. Maxing out my investments in mutual funds (especially my Roth in my mid 20s) takes priority over almost all other financial decisions I make.

It certainly also helps that I have diversified my income over the past two years and that I have a position with my employer that I feel is extremely secure.

What do you think?  Have I made another personal finance sin?  Have I gone absolutely mad because I feel the emergency fund isn’t the holy grail of my personal finance life?  Let me know your thoughts below.

12 Responses to Giving the Middle-Finger to My Emergency Fund
  1. Mrs. Micah
    January 20, 2010 | 7:36 am

    Sounds like you’ve got things very well covered. I’d known there was a way to repay, but I hadn’t known about the time frame. Good to know! :)

  2. Budgets are the New Black
    January 20, 2010 | 7:39 am

    We are almost done eradicating our consumer debt, and the debate we’re still having is whether we immediately focus on bulking up our emergency fund or if we make a contribution to our ROTH for 2009 first…
    We halted our 401k contributions early in the year to focus on debt. But I don’t like losing this time!

  3. Craig
    January 20, 2010 | 9:33 am

    I am looking into doing a similar strategy as well based off of your advice and reasoning. It makes sense to get the money in the Roth as early as possible. Hopefully a real emergency does not occur.

  4. Kelly
    January 20, 2010 | 9:43 am

    Makes sense to me! I don’t think you need a huge emergency fund anyway, you’re single, young, and don’t have a ton of expenses to begin with.

    If it were me I would’ve kept it in the EF, but I have a family, and many more expensive emergencies.

  5. MoneyProgress
    January 20, 2010 | 10:55 am

    I’ll admit that I like having a lot of cash on hand, whether you want to call it an emergency fund or whatever else. At the same time, one of my favorite features of the Roth IRA is that you can always take your contributions out at any time if you really have to. I knew this, but I did not know that you could put them back in within 60 days! Thank you very much for pointing that out! Just reinforces even more how great Roths are.

    In the end though I would probably be more conservative than you. I like to have 12 months of cash around. Once you have that buffer you can then pile everything else into retirement accounts. It really doesn’t delay your investing that much. What I’ve done before is max out my Roth IRA but leave some of it in a money market account until I’m comfortable that I have enough cash savings and then move it to stocks/bonds/etc.

  6. J. Money
    January 20, 2010 | 1:30 pm

    I think you’re crazy, and I love it! Sometimes you’ve gotta be extreme to get this stuff done, so good job. And that comes from someone who LOVES his emergency fund! But truth be told, he loves his retirement accounts more 😉

  7. Matt Jabs
    January 20, 2010 | 2:06 pm

    Sounds smart to me… unless you have any high interest debt remaining. At this point in your life I would advise you do exactly what you did… nice work Brian! Hopefully you & J-Money can get that house boat sooner rather than later… and live happily ever after. 😉

  8. Ken
    January 20, 2010 | 8:30 pm

    If you have no other debts I think this is a good decision. Saving for retirement is important. It’s all about what you can live with and it sounds like you have thought it out. Good luck.

  9. Financial Samurai
    January 20, 2010 | 8:56 pm

    Brian, you’re right. Cash is cash, no matter which way you deposit it. I’m against a ROTH and especially convefting to a ROTH but it’s not bad. It’s just less good. The most important thing is you’re saving and investing! Good work!

  10. Brian
    January 21, 2010 | 3:14 pm

    @Mrs. Micah – Yeah that 60 day period made me feel comfortable enough for this year.

    @Budgets are the new Black – I feel the same way… have to get that money in early! BTW, love the blog name.

    @Craig – Glad we had that chat, i like what you are doing with your Roth and am pumped for you.

    @Kelly – Of course not having a family makes things much much easier. Lets hope no Baby My Next Buck’s come up unexpectedly!!

    @MP – Yeah.. i thought about holding the $5000 in a money market account and then dumping it in at the end of the year if i haven’t had an emergency. However, then i would lose the gains that i think the market will make this year. I don’t think it will be as great as last year, but still i think the recovery will continue for 2010.

    @J – Its your retirement account balances that inspire me to dump money in there like none other.

    @Jabs – Happily ever after… but he will have his boat, and i will have mine. His wife will decorate his, and well, mine will be the bachelor pad… Which one do you want to come visit more often?

    @Ken – Thanks… i think living like this is sustainable for a year, but then more income will be necessary, and thus a larger emergency fund. We will see what happens.

    @FS – You recommend straight market investments because of the ability to use for mid life purchases as opposed to retirement? I don’t know… i struggle with that, and i make sure i invest in my brokerage account, but i like the feeling of completing something. If i was only allowed to put 10K into the market for a year, i would try to “max” that out. When my income shifts for the positive, i think the Roth will go away and more stocks and mutual funds are where i will focus my assets.

  11. FinEngr
    January 24, 2010 | 6:22 pm

    Glad you used the money – that’s optimizing your system. The only problem I foresee is if that 60-day loan fell over a distribution period, then you’re missing out on that additional amount. But that’s relatively minor.

    Emergencies can come in a variety of forms – anticipated/planned, anticipated/not planned, not anticipated/planned, and not anticipated/not planned.

    Not sure why people take emergency funds as hallowed accounts that can never be withdrawn from. They always look towards the worst case scenario (not anticipated/not planned). As long as some minimal buffer is maintained (determined by user), one of the benefits is having that liquidity to move around when necessary.

    Every year I use my “emergency” savings to fund my yearly Roth contribution on Jan 1st. I’m done for the year, and can focus on other investments. The added bonus is the withdrawal forces me to pump the savings back up to where it was beforehand.

  12. Daddy Paul
    February 2, 2010 | 5:44 pm

    You appear to have researched the situation you will be ok. From someone who put 80% of my salary into my 401K for three months to max it out and lived out of my HELOC at that time you may be conservative.

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