Let’s jump right into this one and begin to discuss the purpose behind the 3 emergency fund accounts. An emergency can happen at any given moment, but will you be prepared to fight through the financial snow storm? In my situation I have about 3 accounts that I can tap if an emergency arises. It helps me sleep better at night because it’s a safety net waiting to catch me if I fall on hard times. Now what is considered hard times is up for debate, as some people feel a trip to the beach for a week is considered hard times.
What is it that makes people want to risk financial stability by liquidating an Emergency account for a vacation?
For me an emergency is loss of income, medical emergencies, avoiding additional financial burden, losing shelter, a major car repair, having no food to eat. I hope you can agree with me that the reasons above are valid enough for anyone to tap emergency fund accounts.
What are the 3 emergency fund accounts you ask?
The 3 Emergency Fund Accounts:
1. Credit Union Account – This emergency account should have no debit card or check writing features, and I use mine for big time savings goals and just in case cash.
2. Online Brokerage with a Checking Account Feature – This is used as a secondary cash flow emergency account and to buy any stock opportunities. If I am short on checking funds, I use these funds for random misc. expenses that I can’t cover with my main checking account.
3. Roth IRA – This is considered a long term retirement account but after 5 years all contributions can be taken out in a financial emergency penalty and tax free. I use this to buy Vanguard Mutual funds and ETF’s.
Well there you go I use all three accounts for different purposes today, but if a big hairy financial event should happen to occur, I can liquidate these bad boys with minimal issues. For this system to work in your favor you need to fund these accounts consistently by direct deposit or some other form of money transfer.
I know that you can see the value behind having a financial safety net like the 3 emergency fund accounts. If you feel this is going overboard then at a minimum have at least 1 emergency fund account (Online or at a Credit Union) and funnel money every pay check into it until you reach at least 10K – 20K.
It will help you avoid adding new debt and help you avoid unnecessary financially related stress. Before you say nah I’ll pass on this experiment, think back and remember the last time you had a financial emergency. How did you handle the emergency? Do you feel the stress could’ve possibly been avoided with your own 3 emergency fund accounts?
Comment on how you feel about the 3 Emergency Fund Accounts?
Rich Uncle EL
PS: An emergency to you might not be an emergency to someone else, but lets use common sense in distinguishing what is really considered a financial emergency.
Thanks for reading and have a great fourth of July.
I like it the idea of three e-funds! I agreed on having the cash on hand for job loss (experiencing that now), medical etc. We have it in a standard saving account with no debit card access. If I need money from that account I need to go to the bank. You want the money available but not too accessible that you use it for non-emergencies.
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If I we’re you I’d get a similar system, a Roth account is a powerful investment vehicle, good luck Brian.
Giving a hard number can be a little misleading. A better metric, I think, is months of living expenses. Aim for at least 6 if your household has two steady streams of income. Otherwise, 12 should be enough.
I said a hard number as a beginning step for some people to reach. I agree 4 -6 months should be the standard EF fund. Have a good day, thanks for reading.
Agree with the idea that the 'Emergency Fund' number should be a multiple of some given number of months. For my household — since we have two incomes from jobs with a very low probability that they will be lost and an existing pension (I'm retired from the U.S. Army) — we have determined that three months of living expenses is sufficient. I'm a firm believer in keeping as little as possible in Emergency Fund account(s), as they generally deliver pretty low yields, and putting as much money as possible to work in various investments.
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Good strategy, invest the rest and compound more money. I prefer about 4 months.
Interesting idea to be sure. We have an emergency fund and a savings fund, plus various subaccounts for other goals. So we have access to money if we truly need it. Like you, I have an IRA, but that's of course the absolute last resort.
I’m glad you like the system. It’s better to have various safety nets to catch you in an emergency. Thanks for commenting.
I've only just come around to the idea of an emergency fund – I used to be too eager to put all my funds into investments, and told myself I could just sell some if I had an emergency. While that's true, it's not the best way to operate, so I finally bit the bullet and set one up. Not sure I'll go much further than 1 thought!
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Yes ideally everyone should be invested for life in great stocks and funds. Hold for long term and watch how it compounds. I only use 1 also, but could use the other two if the situation is worse than expected. Thanks for commenting.
Interesting approach. I can understand the first two but quite honestly, I'm confused by the third. Why not just determine how much you need in the emergency fund and then ensure that amount is accounted for between the other two accounts … outside of the Roth IRA. As the name suggests, I think a better approach would be to contribute (consistently) to the Roth IRA solely for the purpose of drawing down in retirement. Again, an interesting approach that certainly provides some food for thought.
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The reason I mentioned the Roth as a possible EF fund is because, we can never really predict how much you’ll need. What if the emergency costs more than the 6 months worth of savings? If that’s the case, then the Roth is another option to help with finances.
It is certainly true that ultimately you never know how much an emergency will cost you.
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I'm not sure three emergency accounts are necessarily needed. I have one and it suits me just fine. I personally recommend a savings or a short term CD with an FDIC insured online bank to put that emergency money. They usually have "high" yields (about 1%), and while it doesn't quite keep pace with inflation, it does allow the money to grow faster than any checking account. And having the money where it's not THAT easily accessible ensures that the emergency money is used for emergencies ONLY, and not another fun money account.
Sincerely,
ARB–Angry Retail Banker
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Hey ARB,
The 1st emergency account I mentioned is the primary account for emergencies. The other two are for investing purposes, but can be used to cover any emergency event that might go over the allocated amount I have saved in the 1st account. Hope that explains it better. Thanks for stopping by.
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Yes I agree having multiple accounts gets confusing and complicated. But the purpose is to separate the goals I have for each account, in addition to that, the online brokerage account is housed jointly with my employer's 401K plan so it is an account I already need to have. I've noticed if you combine the accounts under 1 financial house, money gets transferred back and forth easier and disrupts the system.
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