Savings

Diversifying My Savings

investment growthLately, I have been in serious saving mode.  My wife and I are looking to buy a house and move from our current location.  In order to do this, we need a down payment, so we have to save some serious cash.  As I have stated before, I treat my savings like a monthly bill.  I don’t consider it paying myself first, because I don’t.  I put money into my savings account once per month with a reminder that is similar to my bills.  It works for me, so I keep the strategy.

As you know, today’s economy punishes savers. We get dismal interest rates, which doesn’t help the saving mentality.  Now, you can borrow money all day with a low interest rate, but if you keep the money you earn, then you get nothing.  It is great how our economy works, isn’t it?  Though I don’t get good rates with my savings accounts, I still save money.  It is more about reaching goals that I set for myself and making sure that I keep myself from spending money.

I used to have a buy mentality and now I have a save mentality.  I like where I am now, but I have been thinking a lot more lately about diversifying my savings.  Yes, I can keep my money in my savings account, a CD, and a few more easy to use savings vehicles, but I wanted more.  Enter my Roth IRA.

Using my Roth as a Backup Emergency Fund

Yes, you heard me correctly. I have decided to start using my Roth IRA as my backup emergency fund.  I have seen many talk about it, but I never really looked at it until a few weeks ago.  As I dug more into it, I realized that it was the perfect savings vehicle (up to the limit of $5,500).  I could add my money into the account up to the limit and let it grow.  Since it is on pace for about 12% gains, I think that is much better than the 0.69% that I get in my online savings account.

I used to be against this method because there is no guarantee with investments.  With a savings account, I know that I won’t lose any money if something happens.  It is all about the peace of mind.  When I was in debt, I needed that mindset, that peace of mind.  I didn’t want to lose any money and I just wanted to feel safe with my money in savings.

What Changed?

As of late, I have been thinking more about a budget planner.  I signed up for Personal Capital and that has opened my eyes into my net worth and my current investments.  If you haven’t tried the software yet, I highly recommend it.  With the great graphs showing me what my money was doing for me and how much I had sitting around in cash, I realized that I needed to make a change.  After researching I realized that putting money into my roth in order to max it out would be a great idea.  Not only would it be better for my taxes, but there are some great advantages to the Roth IRA.  Here are the advantages and disadvantages of using my Roth as my emergency fund.

Advantages

  • Easy to transfer money into my Roth with just a bank transfer
  • The ability to earn more money with better stock market returns
  • I can pull out my contributions at any time without penalty

Disadvantages

  • It can take a few days to get money out
  • I can lose the money that I put in
  • There is a limit on how much I can contribute per year (currently $5,500)

As you can see, there are some advantages and disadvantages to using your Roth as your emergency fund.  Since I still need to keep my saving mentality and that peace of mind, I wanted to use the Roth as my backup emergency fund.  Maybe I can call it my emergency emergency fund.  I think that my mind will be at ease knowing that I don’t have all of my funds in my Roth IRA, but I have the ability to grow my money at a faster rate than keeping it in an online savings account.

What Do You Think?

I would love to hear what you think about using a Roth IRA as an emergency fund or as a backup emergency fund as I am doing.  Would you do it?  Are you doing it right now?  I have already transferred enough money into the account to fully fund it by the end of the year, so I am ready to go.

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Grayson Bell

Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $75,000 in debt ($50,000 in just credit cards). I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a WordPress maintenance and support company, along with another blog. It is Empowered Shopper, which helps people get information about products they want to buy. You can also check out Eyes on the Dollar, which is a great blog that I co-own.

38 Comments

  1. August 5, 2013 at 6:52 am — Reply

    Grayson, I applaud your decision to save your money in a Roth IRA instead of some remedial bank account earning absolutely nothing. I think my investments are also on pace to do +10% returns which is very exciting!

    However, be careful the whole “withdrawal” thing. For years I thought and also read on other PF blogs that it was okay to take out your Roth IRA contributions if you needed after 5 years. Then a reader pointed out to me that this is not necessarily the case. Go to the IRS website and look at Figure 2-1 near the bottom of the page. Even after you wait 5 years, there are still requirements for making withdrawals that you still have to meet or you will pay the 10% penalty and taxes.

    http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231057

    • August 5, 2013 at 7:15 am — Reply

      Thanks for the comment MMD. From all of the things that I have read is that I can take out my regular yearly contributions without penalty. I don’t have any conversions, so that 5 year time frame doesn’t apply. I have read this in Kiplinger, Forbes, Fidelity, and many other sites. I will dig into this more and see if I can figure it out some more.

  2. August 5, 2013 at 6:56 am — Reply

    I think that if you wouldn’t otherwise max out your Roth, then considering it an e-fund can be an effective strategy. I think it’s much better to have an e-fund separate from your Roth, but you don’t want to miss out on the early years of contributions so if it’s really the only way to go, I think it’s a good option. With that said, if it’s really e-fund money that you have to count on being there, don’t put it in the stock market. Put it in a CD or money market account. There’s no rule that requires a Roth to be invested in a risky manner. And as soon as you can, get rid of the mindset that the Roth money is there for an emergency. Too many people view it as their personal piggy bank when it should really stay untouched for decades.

    • August 5, 2013 at 7:18 am — Reply

      Thanks Matt. This is why I didn’t put all of my efund into the Roth. I only put a small portion into it and I don’t plan on taking it out. I just like knowing that I can, if need be.

  3. August 5, 2013 at 7:21 am — Reply

    I’ve never considered using a Roth IRA as a backup savings vehicle, but it makes a lot of sense. It seems like a viable alternative vs. just having the cash sitting in a savings account. I like it!

    • August 6, 2013 at 7:09 pm — Reply

      I think it could be a pretty good backup emergency fund.

  4. MomofTwoPreciousGirls
    August 5, 2013 at 7:34 am — Reply

    I think having it there as a last resort is good, but the point of an emergency fund is to be there, easy to access and safe in case of an emergency! I think if you are in a place where you need a larger efund (more than the typical 3-6 mos) then laddering your savings over different maturities of CDs or treasuries can yield a little better return, but that part of money isn’t meant to earn significant money. It’s just there as a safety net. The ideal is to have both!

    • August 6, 2013 at 7:10 pm — Reply

      This is why I plan on using it as a backup emergency fund. I have an emergency fund, but this will be there as a backup to it. It could earn more money, but my projection is that I wouldn’t need it.

  5. August 5, 2013 at 8:25 am — Reply

    That’s an interesting way to go about it, I’ve not heard about it, but if you can make some nice gains then it’s not too bad. Like MMD said though, I’d be very leery of the withdrawal issue. I am trying to remember back to my IRA days, but there are a number of cases where it’s not considered a qualified distribution and you do run into a taxable situation (on the investment earnings), if the account has not been open for 5 years and under 59 1/2 in age. The contribution may be able to be taken out, but the earnings and reason behind the withdrawal are what generally poses the issue.

    • August 6, 2013 at 7:11 pm — Reply

      There are a lot of things to look into with the Roth, but from what I have read and looked into, if you are just contributing a regular amount and it isn’t a conversion, then you have the ability to withdraw.

  6. August 5, 2013 at 8:40 am — Reply

    Hmm, interesting, Grayson! We may look into this! I don’t remember much about ROTHs from my banking days, but maybe it’s time to brush up on the details.

    • August 6, 2013 at 7:12 pm — Reply

      I have looked into it and I think it could be good. I don’t want to dump all of my emergency fund in there, so this works well for me.

  7. August 5, 2013 at 9:02 am — Reply

    I personally only use my ROTH IRA for retirement but I don’t mind that strategy. It’s a personal decision!

    • August 6, 2013 at 7:13 pm — Reply

      It is a personal decision. My projection is that I won’t need it, so my plan is to just leave it in there. I know that I can get it if I need it, so that is why I did it.

  8. August 5, 2013 at 1:08 pm — Reply

    I think it is a great idea, but with a caveat. I would not want it to be my first go-to moeny in case of an emergency. Because it has the ability to grow tax-free, and because as you stated it can take a few days to get out. I would like to have some other money on hand, or readily available, before I had to go to this. Other than that i can’t think of any real negative to it. I know you can lose money whereas with a savings account you can’t, but nothing ventured nothing gained. Inflation averages more than .69% so that’s like losing money. I haven’t used my ROTH for this yet, but I like the idea. i ‘m going to start researching it now that you have brought it up.

    • August 6, 2013 at 7:14 pm — Reply

      This strategy is being used as my backup emergency fund. I have some money sitting in savings that I can get at a moments notice.

  9. August 5, 2013 at 1:14 pm — Reply

    I think it’s a fine idea (in most cases). I know many people think that it should only be for retirement, but if you weren’t going to max it out anyway, why waste the tax advantaged space.

    • August 6, 2013 at 7:15 pm — Reply

      I certainly agree with that. Why waste the ability?

  10. August 5, 2013 at 1:35 pm — Reply

    Have you ever considered using high interest checking to save money? I’ve come across high interest checking accounts with rates as high as 4%, although that caps off at $10,000 and you usually have to make X amount of debit card transactions monthly to maintain that interest rate. It definitely isn’t enough to make a down payment but it’s nice accessible savings account for shorter term savings goals.

    • August 5, 2013 at 5:46 pm — Reply

      All of the “high” interest checking account require me to use their debit card. I think that would be against what a savings account is for. In order to get the interest, I would have to spend money. I just don’t want to have to keep up with the spending limit, just to get 4%. I appreciate you adding in this insight about using a checking account.

  11. August 5, 2013 at 1:42 pm — Reply

    I think it’s a fine idea if you weren’t already maxing out the Roth. I have quite a bit sitting in a plain old savings account right now because I think lots of it will have to go toward taxes next year, so I can’t risk it. I wish there were more options as far as savings, but the low rates have certainly helped me with real estate, so I guess it’s a wash.

    • August 6, 2013 at 7:16 pm — Reply

      This is one reason why I don’t have everything in there. One, my efund is larger than the annual contribution limit, so that wouldn’t work, but I am just testing this strategy to see how it works.

  12. August 5, 2013 at 3:22 pm — Reply

    personalcapital.com is amazing. Thank you for sharing the site!

    • August 6, 2013 at 7:16 pm — Reply

      I agree and you are welcome.

  13. August 5, 2013 at 3:59 pm — Reply

    In all honesty my knowledge of Roths isn’t very good. I had a friend who took money out of his Roth for school then ended up owing a lot of taxes (that he didn’t have the money to pay). It was a huge mess. But clearly that was his fault for not doing his own due dilligence before making that decision. As long as you know how everything works and it makes sense for you, I see no reason not to move forward in that direction.

    • August 6, 2013 at 7:17 pm — Reply

      Did he take out money that included his earnings? If you pull out any earnings, you will be paying, no doubt about it. I am testing this strategy and I hope it works out.

  14. Derek | MoneyAhoy.com - Money Saving, Making Money, and Investment Ideas
    August 5, 2013 at 4:15 pm — Reply

    Interesting approach, but I look at things a bit differently.

    The biggest reason I see for needing an emergency fund is if you get laid off from work. You are much more likely to get laid off from work and have a hard time finding another job if the economy tanks. If the economy tanks, stocks will go down. If stocks go down, the amount you have in your IRA will drop. This could force you to withdraw your investments at the worst possible time.

    Have you considered setting up a HELOC? I think Mr. Money Mustache suggested this, and it sounds like a little less of a risky situation to me. You could still put your money in the IRA or other investments, you just wouldn’t be forced to sell at the worst possible time if you were already pre-approved for a HELOC if the worst were to happen…

    • August 5, 2013 at 5:42 pm — Reply

      I guess I didn’t write this up that well, but I did indicate that this would be my backup emergency fund. I have an efund that is much more liquid and in safe investments, but this is my backup emergency fund. I know exactly what an efund is for and that is why I didn’t put everything into my Roth IRA. My hope is to not use it, but knowing that I could if something terrible happens.

      A HELOC wouldn’t work for me because I have very little equity in my house, so this would be a mute point. I know the power of a HELOC, but if you have no equity, you can’t really use one!

  15. August 6, 2013 at 7:12 am — Reply

    I wouldn’t treat a retirement account as savings for anything other than retirement. And I am certainly not going to invest my savings any time soon. During the recession, my wife’s 401(k) lost HALF of it’s value in under a year. So I am never going to really trust the stock market for anything important.

    • August 6, 2013 at 7:21 pm — Reply

      My 401(k) lost a lot during the recession as well, but since it has gained it all back plus a lot more. That is the nature of investing and the stock market. If you hold the funds in there, then you would have seen the better end. That being said, I only put in a small fraction of my emergency fund into the Roth. I still have quite a bit left for emergencies.

      • August 6, 2013 at 10:01 pm — Reply

        My wife’s still isn’t back to what it was at it’s high in 2008, and that is after adding a couple grand in contributions.

        • August 7, 2013 at 9:55 pm — Reply

          Sorry to hear that Edward. How much control does she have on where her funds are allocated?

  16. August 6, 2013 at 11:00 am — Reply

    I certainly understand the logic here, but I’d just be worried about hitting hit with fines for withdrawing too early in the case of emergency. But you addressed this in the comments section. I’m a big fan of Roth options for IRAs/401(k)s for young investors. While I’m in the process of sorting out the best way to save/grow my money, I may look into this as an option. Thanks for sharing!

    • August 6, 2013 at 7:22 pm — Reply

      I plan on just trying this out to see if it works for me. I do think it could work and know quite a few people that have done it. It is just using another vehicle to diversify your money.

  17. August 6, 2013 at 1:30 pm — Reply

    One thing to worry about is if everything collapses at once. If you are investing aggressively with that money (or semi-aggressively) and the market turns, and then you lose your job…it would suck to have to take the money out when markets are down.

    I know that in a real emergency, I would be able to tap my Roth IRA in addition to what’s in my savings account. But if I used it as a true emergency fund, I can’t funnel money from my savings to Roth IRA fast enough so I would end up with double the emergency fund. Which sounds great, but really it would mean more money sitting around not earning what it could potentially earn.

    • August 6, 2013 at 7:23 pm — Reply

      I certainly understand this point. This is why I only put in a small fraction into my Roth. I plan on using this as my backup emergency fund, so I still have my money sitting in my savings account, but I also have this. It is all about diversification.

  18. August 6, 2013 at 10:43 pm — Reply

    I think this is viable as a backup emergency fund – a Roth that is. Personally, I lean toward the idea of using one as a retirement vehicle, but the alternative makes sense too.

    • August 7, 2013 at 9:57 pm — Reply

      I plan on using as both. I will only use what I put in for emergencies and leave all my regular contributions in there. If I don’t have to use it for anything, since it is my backup e-fund, then I will be better off in my path toward retirement.

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