Every year my family goes to Corolla, NC for a little rest and relaxation. For those you who haven’t been to the outer banks. It’s the best.
We get to the house Saturday morning, and stay put until the following Saturday. We eat, we drink, we swim, and we relax. Throw in a round of golf, a workout, and a couple good books, and you’d be amazed at how fast a week flies by.
So there I was last Friday. Getting excited for the trip, doing a little packing, and knocking off a couple “to do’s.” One of those to do’s was to have a heating and air conditioning guy come check on our unit.
45 minutes later, boom… a $2,000 bill!
To make matters worse, the night before I reluctantly agreed to upgrade the master suite closet as a (god I hate this term) “push present” for “N”.
How quickly I go from feeling pretty good about things…. to a few thousand bucks down the drain!
Good thing I had a week to release the steam. After I settled in and accepted my fate as a homeowner, I began to think about how critically important it is to have an emergency fund.
What is an Emergency Fund?
An emergency fund is just that. A place where you can get immediate access to money you need in an emergency. It’s safe, its secure, and its accessible. The rule of thumb is to have 3-6 months of living expense needs set aside in cash of an emergency.
What can an Emergency fund look like?
So what does it look like? Here are a few options…
1. Checking/Savings account
The most common emergency fund. And yes, I get it. I can hear you already. In today’s environment you’ll be earning little to nothing in terms of interest. But earning interest on this money isn’t the point. The point of this money is to make sure it’s there, and available, when you have the sudden need.
2. Home Equity Line of Credit
Before we go any further, if your mortgage is already a large percentage of the total value of your house, you may want to forget this option.
But for those that have substantial equity in their home. A HELOC can be a great option for an emergency fund. A home equity line of credit (HELOC) allows you to borrow against your house.
The interest you pay is potentially lower than what you are paying on your credit card, and it can be used as a deduction on your annual tax return.
3. ROTH IRA
A ROTH IRA can act as an emergency fund. You’re actually killing two birds with one stone. Saving for retirement while protecting for uncertainties.
The money you put into a ROTH IRA is after-tax money. And just like a savings or checking account, your contribution to a ROTH IRA can been withdrawn penalty and income tax-free at any point (IMPORTANT – the earnings portion of the ROTH is not afforded these same privileges).
Lets take a look at a hypothetical example. Assume an investor has contributed $5,000 for 10 years into a ROTH IRA. And over those 10 years, the money has grown at a rate of 6% on average.
- Total contribution – $5,000 for 10 years $50,000
- Total value after 10 years – assuming 6% $65,903
- Total earnings – $15,903
At this point in time, the investor can access $50,000 (the emergency fund) from the account tax and penalty free. The $15,903 should stay invested until the investor reaches at least 59.5.
4. Investment/Brokerage Account
If you have a large amount of money invested in a non-IRA investment account, this can act as your emergency fund. Keep in mind, the account value can and will fluctuate. If you need to access some or all of your investments when the market is down, it’s possible you will receive less than what you put in. Receiving money from your investment account can take a few days longer as compared to our bank account.
Disclosure – The above example is for illustrative purposes only and does not attempt to predict actual results of any particular investment.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net