Everybody’s heard it: You need to save three to six months’ expenses in an emergency fund. Not as many of us have actually done it. In fact, a 2014 survey indicated that most of us couldn’t cover even a $500 calamity. That means we are clearly under-saving — it’s hard to argue that having anything less than $1,000 will be adequate to keep an unexpected expense from knocking your finances way off course.
But three to six months’ expenses? While that may be ideal, that can seem insurmountable, given how many of us don’t have enough cash on hand to cover even an unexpected plumbing emergency. And yet it’s hard, with so many other wants and needs emptying our wallets and so many “shoulds” filling our heads.
Saving enough for retirement? What about the kids’ college? Oh, and shouldn’t you try to pay off your mortgage before you retire? And summer’s coming, time to start saving for vacation. It’s easy to wonder if anything will be left to buy groceries or pay the electric bill, let alone to put in an emergency fund for the medical crisis, job loss or gigantic home repair you hope won’t happen. It’s also impossible to know how much you’d need in a worst-case scenario (picture all of the above, and now the car is making a funny noise).
Add that to rock-bottom interest rates that seem to penalize savers, and it’s easy to understand why some people question the wisdom of having money that is accessible but not working very hard for you.
Try figuring out what you’d do if you had a financial emergency — and you might discover that you already have some options. And the object of your emergency fund is to keep you from running out of options. It’s not necessarily true that everyone needs an emergency fund, although we all do need a way to fund an emergency. But if you have enough set aside so you can sleep at night, you may have “enough.”
Here are a few options if you don’t want or can’t afford a traditional emergency fund.
1. Withdrawing From Your Roth IRA
If you can’t afford to fund a Roth IRA because you are instead trying to pad your emergency fund, you might want to think about that.
Your unused emergency funds can’t be put into a Roth later if that amount would take you over the annual limit. However, if you need access to your Roth funds in an emergency, you could get to the amount you contributed without any penalty or fees. (Earnings in the account, on the other hand, may be subject to penalties and/or taxes, depending on the timing and purpose of the withdrawal.) And if the emergency didn’t happen? The money would continue to grow in your retirement stash. (A traditional IRA or 401(k) would not work that way — you would owe taxes plus a possible penalty fee for early withdrawal.)
2. Your Emergency Supplies
Money isn’t the only thing you’ll need in an emergency. Some of your emergency provisions may be in your pantry or other storage place. Don’t underestimate the value of bottled water, canned tuna, peanut butter and crackers. If the emergency is a natural disaster, your stash will be valuable. So, yes, the grocery store’s “stock up” sale may be an opportunity to be prepared.
3. Being Ready & Willing to Sell
You may not — and probably will not — get top dollar if you have to sell in a hurry, but if you have made peace with parting with high-value items in order to fund a financial need, the baseball card collection you’ve had since childhood or the painting hanging in your living room could be your ticket out of a financial hole. However, you need to be aware of the value. Just thinking, “something in my parents’ attic just has to be valuable!” isn’t the same thing.
4. A Home Equity Line of Credit
Be aware that a home equity line of credit is a secured loan and your home is on the line. Still, if you have a great deal of home equity (rising home prices may have boosted your equity), you may be willing to use some of it to get through a crisis. You can consider having a line of credit approved now, and using it only in an emergency. A strategy like that would allow you, if you wanted, to try to pay your house off faster without worrying that perhaps you should be putting the funds in an emergency fund instead.
5. A Low-Interest Credit Card — or a No-Interest Offer
Applying for a low-interest credit card — or one with a no-interest introductory period — can be enough to help you get through a crisis, particularly if your budget isn’t already so strict that you can barely afford necessities. A little belt-tightening may allow you to pay off the debt in a few months. But beware — the time to check to be sure you have a relatively low-interest credit card is before you have an emergency — depending on the nature of your financial emergency, it may make a new card harder to qualify for. This is not a first option, and may be what you do as a last resort.
Unfortunately, financial emergencies don’t have the decency to end when your money runs out or to wait until you’ve had a time to recover from the last one. Credit, used wisely, can help you minimize the cost of necessary borrowing. And even if you don’t have to use it, it can give you the “sleep better” peace of mind that you would have access to funds if you needed them. Knowing where you stand credit-wise can help your comfort level even if you don’t have to borrow a dime to cover your emergency. If you don’t know, you can get two of your credit scores for free from Credit.com. And if your credit needs work, you can take time to rebuild it so that should you need credit, you will have better access to it.
But the point of any emergency fund is not a certain number — it’s to allow you to focus on whatever the emergency is rather than worrying about financial ruin in its wake. So your number is really the one that helps you sleep at night, and it can depend partly on the assets you have now. What you’re really looking for is a Plan B. And, like emergencies, those are not one-size-fits-all.
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