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3 Ideas for Your Emergency Fund

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Part of your journey to financial freedom should include saving money. Building an emergency fund is a great way to save money for unexpected expenses. Your emergency fund can ensure that you are prepared for what's next, in a way that reduces the need for you to turn to debt to meet your unexpected costs.

 

If you are looking for a way to build your emergency fund, here are 3 ideas for where you can keep your money:

1. High Yield Savings Account

This is the classic location for an emergency fund. A high yield account can help you squeeze a little more yield out of the money in your fund. The advantage to a savings account is that you have easy access to the money; it's cash, so it's highly liquid. Additionally, if you have your money with a bank insured by the FDIC, your funds are protected up to a certain point. It provides peace of mind.

You might have a little trouble accessing your funds, since it can take three to four business days for a transfer from your high yield savings account to your primary account. You can make things easier by linking to another account, or asking for a debit card to access your high yield account.

2. Taxable Investment Account

Another option is to set up a taxable investment account to use as your emergency fund. This is one way I prepare for emergencies.

I have the same amount automatically invested each month, and it grows over time - at a much faster rate than cash. If I need additional funds, I can sell some of my shares. I use a first in, first out cost basis, so when I withdraw, the first shares bought are those that are sold first.

So far, this process has led to my gains being taxed at the long-term capital gains rate, since the shares I have sold have all been held for all at least one year and one day. If there are losses when I sell, I can deduct those against my income on my taxes.

The downside to using this account as an emergency fund is that the money takes even longer to access. You have to first complete the transaction to sell shares, and then you have to wait for the money to be transferred to your account. Linking your investment account to a bank account (with a debit card) can shorten the process, but you have to be prepared.

I have a small amount of money in a savings account that is immediately accessible; this money is enough to hold me over until I can take care of other necessary transactions.

3. Roth IRA

Another option is to make use of the Roth IRA. You are allowed to withdraw your contributions at any time without penalty (withdrawing your earnings, though, is another matter). I know people who use their Roth IRA accounts as emergency funds. They max out the contributions each year, and reap the higher yields that come with an investment account. 

The main downside to using your Roth IRA as an emergency fund is that you miss out on having your capital in the account, earning interest. You have opportunity loss when you use your Roth IRA as an emergency fund. And, of course, you once again have the immediately liquidity issue. With a little planning, though, it's usually possible to prepare for such a contingency.

The important thing is to have an emergency fund. While using a retirement account for an emergency fund is not my preferred option, there are those who use it with reasonably good results. Consider your risk tolerance, and what you hope to accomplish, and then decide what type of emergency fund (or combination) will work best for you.

Other Articles By Miranda 

Is Your Budget a Tool for Financial Self-Improvement?
First Things First: Spend Your Money on What's Most Important
Do the People that Surround You Share Your Money Values?


Miranda Marquit, Guest Financial Blogger for CareOne Services, Inc.

Miranda Marquit

Miranda lives in Utah and is a freelance writer and professional blogger, specializing in topics related to personal finance and business. Her work has appeared in, and been linked to from, a variety of publications, online and offline. Miranda blogs for a number of web sites, and has her own personal finance blog, Planting Money Seeds.  

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  • This was a good time for me to read this blog!  I am currently setting up my automatic withdrawal to be increased on my emergency fund which I have set up in an ING account.  It does take 3-5 days for the funds to be transferred to my checking account however, I don't think I am ready yet for a debit card or to link a checking account to this account yet.  I want to feel a bit more stable before I do this even if ING does keep sending me emails with an offer of $50 if I set up a checking with them.

    What I have been thinking about is to have a savings account linked to my checking for an additional emergency fund with only $500 in it for the true right now ouch emergencies.  Any thoughts on this idea?  I know it won't be gaining very much interest as it will not be in my high yielding higher balance savings, but I don't want to be left without money that is easier to access for those right now emergencies for like a new tire, or if I need a tow etc....

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