I received the following email the other day:
I read a blog post a few weeks ago at Mint.com about using your Roth IRA as an Emergency Fund. Here’s the blog post: Does Using a Roth IRA as an Emergency Fund a Good Idea?
I’ve been following your blog for several years now (you even wrote a blogpost about a question I wrote to you in 2009).
Anyway, I used to contribute to my Roth IRA regularly, but then stopped amid job transitions. I have a decent sized emergency fund set up, and recently decided to target 6 months expenses. I understand not having the entirety of an emergency fund set up in a Roth, since the value can actually go down when you might need it. I was just wondering what your take is on the blog post linked above?
Here are my thoughts:
First I would focus on getting 3 months’ worth of expenses socked away in a cash account for the bulk of the emergency fund. Then, I would invest through a Roth IRA and use it as a backup if necessary. So, I think the strategy has some merit. Yes, there is some risk involved due to volatility but if you already have 3 months saved up in cash, you may never need to take from the Roth.
The most important thing regarding emergency funds is to make sure you use it just for real emergencies (like the air conditioner goes out or for an insurance deductible). Too many people think new shoes are an emergency.