Lately, 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.
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.
- 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
- 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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