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.

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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.

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