The first time I heard of the “Emergency Fund” concept was several years ago when I was checking out the message boards on the Motley Fool. I wasn’t in great financial shape at the time, but with my new job, I was seeing some improvement.
Now that I understood the importance of an amergency fund, the question was how much to keep available. Advice from people ranged from three months to one year’s worth of expenses in cash or a money market account.
The Armchair Millionaire (via CNN Money) has some questions and answers regarding emergency funds.
I have about three months of expenses in savings accounts right now, most of which is earmarked specifically for emergencies. I try not to dip into that. In addition, I have a substantial amount—probably more than six months’ worth—in my Roth IRA, which I can withdraw without penalty if I need to.
I feel that this should be all right, as long as I can keep my hands off the savings set aside for emergencies only. How much do you have ready to be accessed in case of emergencies?
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1:21 pm (reply)
6 mo. in a money market acct. and if I absolutely had to I could tap my Roth IRA for a total of 1.5 yrs.
If one were afflicted with a serious medical emergency, even 1 years worth might not be enough.
4:18 pm (reply)
I keep between 1 to 6 months on a money market account. Optimum should be 3 but it fluctuates.
If I need to tap into money I can use money from brokerage account where I have around 40 months worth. (Hey! I need many months worth if I want to retire early… and I am short of the goal :) )
I would avoid taping into a Roth IRA, IRA, or 401k. Why? Because once I get the money OUT, I can’t get it back IN. (yearly limits, remember).
6:44 pm (reply)
6 months in my savings account earning nothing. I should move it to a money market. In addition, I have the equivalent of 24 months of expenses in 2 CDs and another 30 months in my brokerage which I can acceess if I have to. But I hope I don’t. Have to that is.
11:51 pm (reply)
I have just started building up an emergency fund. I would eventually like to have about three months worth in an immediately available account and another year’s worth in an investment from which I can safely (without significant losses) withdraw with in about one week.
6:35 am (reply)
I’ve got about 4 months worth in savings. If I dip into it, I only draw it down to the 3 month mark.
I’ve dipped into it on occasion over the past 10 years:
Medical bill
Dental bill
Emergency travel for a dying family member.
Car repairs.
Home repairs. (ie. Water Heater)
10:05 am (reply)
9:24 am (reply)
Another factor that you can consider is disability insurance. If your company provides short term and long term disability insurance your emergency fund does not have to be as large. If they do not, look into getting an individual policy. For $50 a month, you can replace lost income in case of injury or illness.
10:50 am (reply)
I think 3 months in a savings account is a good rule of thumb. If you want to have more than that available as a liquid investment, you can put it into a non-IRA mutual fund account with no short-term trading penalties. It may fluctuate, but should grow over the long term if you have no sizeable emergencies.
Even thinking that you can dip into your IRA if you need to is a bad idea, in my opinion. IRAs are part of your retirement savings. Dipping into your IRA or 401k should be an absolute last-ditch, dire circumstance option, coming just before selling your home.
Also, earnings in your Roth IRA would be taxed and penalized if you take them out before age 59 1/2. Only original contributions can be removed without penalty. Any money taken from a Traditional or Rollover IRA or 401k or 403b is all taxed and penalized.