emergency fund

Three Times an Emergency Fund Can Save Your Finances

October 22, 2015 by editor

An emergency fund is a crucial component to leading a healthy, secure financial lifestyle. However, many people tend to put off developing their emergency fund because it is hard to commit money to an account where it will just sit untouched for, ostensibly, ever. There are so many other places where you can see the effect your money has: paying off student loans, mortgages, credit card debt, and more.

[Read: Keeping Emergency Funds in a Roth IRA]

Despite the many arguments that can logically lead to investing your money elsewhere, creating an emergency fund is one of the most important things you can do with your finances. Bank of America suggests that your fund should include enough money “to cover your major expenses for 6 months to a year”. That may seem like an unreasonably large amount of money, but once you consider these two simply circumstances that could happen to anyone at any time, you’ll understand why.

When You Can’t Suddenly Can’t Work

Although the economy is in recover, it still is not quite stable. Shaky job security is just one element that contributes to unexpected loss of work, though.

You’ve Lost Your Job: The current rate of unemployment in the USA is 5.1%. Finding a new job can be difficult, for some people more than others. FiveThirtyEight Economics found in its analysis of long-term unemployment that “men are a bit more likely to become long-term unemployed than women; blacks are more likely than whites; and, most significantly, older worlds are more likely than younger ones.” Having an emergency fund can allow you to focus on finding a new job without the added stress of being unable to meet basic daily needs while you search and apply.

You’ve Been Injured or Become Ill: The United State Department of Labor has two laws that it oversees designed to address “when employees are injured or disabled or become ill on the job”: the Americans with Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA). Although you may be entitled to some sort of Workers’ Compensation or Medical Leave, having an emergency fund can not only help with medical treatment but also with the sudden loss of income – a sure blow to your finances.

When You Have Unforeseen Expenses

Poet Robert Burns coined an invaluable phrase for saving finances: “the best laid schemes of mice and men.” Even the most meticulous list-makers and think-aheaders can be blindsided by life, and having an emergency fund ready can save you from what you didn’t even know was coming.

Your House Needs Work: Homes cost a lot of money, and even the most experienced homeowners can be caught off guard, sometimes. Fortunately, an emergency fund can save you from your own naivety, Mother Nature, or an excellent asbestos investment made by your 1960s contractor. CNBC compiled a list of 20 Hidden Costs in Home Ownership, which range from Property Taxes to furnaces to construction down the street. An emergency fund, put away for a rainy day, could save your finances when that rainy day leads to leak in your ceiling.
You Suddenly Have a Death in the Family: According to the National Funeral Directors Association, the average 2014 cost of an adult funeral with a viewing came to $7,181. A cremation and viewing takes the price down a bit, coming in at $6,078 on average. Even when it comes to the death of a beloved pet, prices range from $50-$1,200. Death is a time of deep emotional stress, but with an emergency fund, it does not have to be a time of significant financial stress. An emergency fund can save you the time and worry associated with a sudden departure, which you can then put towards the grieving process instead.
You Suddenly Have a New Member in the Family: On the other hand, it turns out birth is significantly more expensive than death. Raising a child can be incredibly expensive, but even just having one can be a huge blow on your finances. In 2012, the average amount paid for conventional delivery in the USA was $9,775, and for a Caesarean birth, the average was a whopping $15,041. Keep in mind that this amount includes only the birth itself – not the medical appointments during the pregnancy, ultrasounds, blood testing, neonatal vitamins, Lamaze courses, maternity clothes, or any of the hundreds of other expenses associated with pregnancy. An emergency fund can give you the financial flexibility to do things like extend maternity or paternity leave, find high-quality childcare, or even improve your insurance package.

[Read: Ways to Save Money]

Don’t wait until it’s too late to save your finances. By creating an emergency fund, you’ll be prepared for the unpredictable, and you’ll improve your peace of mind. Life is wonderful, but it’s full of surprises, and some of them can be ridiculously expensive.

Keeping Emergency Funds in a Roth IRA

May 15, 2014 by editor

A Roth IRA allows you to kill two birds with one stone by allowing you to put as much as $5500 from your emergency fund into your IRA ($6500 if you are 50 years of age or older). The money that you put in from your retirement account can then be withdrawn since you will have already paid taxes on the contribution. The rest of the untaxed money in the Roth IRA must be kept in the account until age 59 in order to avoid being penalized. Here are some important things to keep in mind when using your Roth IRA as a vehicle for emergency funds:

Know why you are putting emergency funds into your Roth IRA

A Roth IRA ultimately exists for your retirement and every year affords you the opportunity to invest more. You may never have to pull money out of your Roth IRA. If this is the case, you will have more money for retirement. Pulling money out of your Roth IRA for an emergency should be a last resort and should only be applied towards a major emergency. You should have an adequate amount of savings in other accounts for minor emergencies. However, pulling emergency money out of a Roth IRA is better than going into lots of credit card debt, and you will not be penalized for it.

Do not withdraw your earnings.

Withdraw only the contributions you have put in to the account. Do not withdraw your earnings or you will be penalized 10%. You can always put withdrawn contributions back into your IRA and maintain your annual contribution.

Do not invest emergency fund money.

You should be able to withdraw your emergency fund money without penalty or loss. So make sure that the money is not wrapped up in stocks or mutual funds. Keep your emergency funds liquid in an account that continues to accrue interest. So long as your account is growing, you will not have to pay taxes on it every year, nor will you have to pay taxes on them when they get withdrawn after retirement.

Having a savings account that is incorporated into a Roth IRA is just as good, if not better, than having a regular savings account. If your bank does not give you this option, then find a bank that does. You may also have more than one Roth IRA, so long as you do not exceed the yearly contribution limit.

Once your emergency fund is big enough, then you can start placing your contributions into investments that earn more. Do not keep your contributions in cash forever once you have acquired an adequate emergency fund.

Do not rollover funds that have been in your account under 5 years.

If you have rolled over money from another retirement account, you need to be aware of certain rules that apply to withdrawing those contributions. You incur a 10% penalty when you withdraw rollover funds that have been in your Roth IRA under five years. If you have both rollover contributions and regular contributions, the IRS will consider any withdrawals to be from your regular contributions first.

Know how long it will take you to access your contributions from the bank in the case of an emergency

The time it takes to access your emergency funds will differ according to the institution and what kind of account you have placed the funds into. Most savings can be acquired in less than three business days. The quickest way to access your emergency funds will usually be by having a checking account at the same institution that maintains your Roth IRA. Since some funds cannot be immediately accessed in the case of emergency, make sure that you have money in a savings account that can be.

Make the most of your contributions.

Always make the most out of your annual contribution since the annual limit is as low as it is. As of this year, you can contribute up to $5500, or $6500 if you are 50 years of age or older. Do not lose out on the chance to invest if you can help it. There are Roth IRA contribution limits for married tax filers, widowers, and single filers which may change from year to year. So be sure to consult a tax professional to figure out what your circumstances may mean for you. You may also make Roth contributions for a spouse who does not work or works for a low-wage. This is another way of making the most of your contributions that many people either forget or are simply unaware of.

Bottom Line

The Roth IRA is the best opportunity to store away emergency funds into an account that accrues interest and is tax-free. So during the 15-month tax year, take advantage of the opportunity by making any contribution you can.

Partner Debt Management And Savings To Achieve Fast Debt Relief

May 28, 2013 by editor

Debt management provides an effective way of getting out of debt. However, if you really want to maximize the benefits that you will get from it, you have to make sure that you will grow your savings alongside your debt payments.

Most people think that putting all their extra money on debt payments will get them out of debt faster. However, there are uncertainties in the future that you have to prepare for. These could cripple your finances if you do not make the necessary arrangements for a back up plan.

Your savings is the best back up plan that you can set up for yourself. It is something that will help you face any crisis that fate will throw your way. Even if you have debt management working on paying off your debts, you need to save in order to keep yourself from more debt.

Here’s the thing, even if your finances will allow you to pay off your debts while financing your daily expenses, that does not mean it will not change. One emergency can ruin it all. If the car breaks down or you need to buy something or replace an appliance immediately, you will have to either get it from your debt payment or your household budget. The way most of us think, it is the debt payment that will suffer for the emergency situation.

If you are going through debt management, one of the agreements with the creditor is you should never default on your payment – otherwise, the plan will be forfeit and you will go back to your high interest payments. To keep this from happening, you should build up your emergency fund.

When you have your savings, you can easily pay for any emergency need without compromising your debt payments. That will help you stay true to your debt management plan despite any incident.

The beauty about this partnership is that debt management allows you to make lower monthly payments – thus give you more room for your savings. You can also create a frugal budget so you have more money to set aside for your savings. Or, you can grow your income.

Increasing your cash inflow is an important part of debt relief. You got yourself in debt because your income is not enough to support your expenses. Even as you lower your expenses by making smart decisions about it, you should also increase your income to make the chances of getting back in debt more unlikely.

There are many ways to grow your income. You can set up a passive business so you don’t have to work too hard to make it earn. You can also use your hobby as a source of supplemental income. If you love to bake, whip up a batch of cookies every weekend and sell it to your colleagues. Be creative and resourceful about it and you should be able to find another source that will secure your finances.

Debt relief is hard but the rewards of debt freedom should make it all worthwhile. Learn your lesson by practicing better financial management and keep yourself from another debt situation.