Unfortunately, if you can’t pay for it this month you’re not likely to be able to pay for it next month. Many people turn to credit cards to pay for the unexpected because they may not have the cash on hand to help. This can create stress and worry about not knowing how you’re going to pay for something that breaks. It’s not likely that you’re going to be able to plan and prepare for the struggles that are sure to pop up in the form of new financial obligations. Having money on hand to pay for the unexpected expenses that pop up is not only a peace of mind but it gives you some financial benefits. Why Having an Emergency Fund Is Important If you encounter a hardship like a disability, or you want to buy a home or further your education, you may qualify for a penalty-free early withdrawal from your Roth IRA. Just be aware of the 10-percent early withdrawal penalty and do your best to avoid it. If you’re already funding a retirement account through your employer and you’ve got some extra cash in a savings account, you can always use your Roth IRA as a backup. If you withdraw only the amount you contributed (meaning not the earnings your contributions have made on the market) you won’t have to pay income taxes on your withdrawals. Withdrawals made before age 59.5 are subject to a 10-percent penalty. As of 2022, you can put up to $6,000 in a Roth or $7,000 if you’re over age 50, and all contributions are made with after-tax dollars. Roth IRAĪ Roth IRA is typically thought of as a tool for retirement planning, but in some situations it can also double as an emergency fund. Allocating some of your emergency savings into a mutual fund or two allows you to keep the rest of your cash liquid while potentially enjoying some significant growth. Playing the stock market certainly entails a higher degree of risk compared to just dumping your emergency cash in a savings account, but there’s also the possibility for a much higher rate of return. Mutual funds are generally considered to be less volatile than individual stocks and it’s a little easier to invest if you’re not familiar with the ins and outs of how the market works. If you hold on to the bonds for at least five years, there’s no redemption penalty, but if you cash them in early, you’ll forfeit the last three months of interest earned. Currently, the interest rate I-bonds are earning around 2.22 percent for bonds issued between Novemand April 30, 2020, according to the Bureau of the Fiscal Service. The shortest period of time you can own them for is one year and you only need $25 to get started. Savings bonds are traditionally thought of as a long-term investment, but I-bonds offer a little more flexibility. Treasury bills offer maturity terms ranging from four to 52 weeks, and the minimum amount you can start investing with is just $100. When you invest in T-Bills, you’re essentially buying them at a discount, and once they mature you can cash in on their full face value. Treasury bills and I-bonds are worth looking into if you’re interested in diversifying your emergency fund savings a little. There are banks that offer no-penalty options, however, so it’s something to consider if you don’t think you’ll need to raid your emergency fund any time soon. In general, the best CD accounts tend to produce a higher yield versus a traditional savings account, but you may face a penalty if you have to withdraw the cash early. You put a set amount of money in the CD and at the end of the term, you get it back along with any interest that’s accrued. No-Penalty CDsĪ certificate of deposit is a time-specific savings vehicle. Money market accounts share some things in common with regular savings accounts in terms of limits on the number of withdrawals you can make each month and the extent to which they’re insured by the FDIC.Ī couple key differences to keep in mind, though, are that money market accounts typically require a higher minimum deposit and you may pay a little more in fees. Money Market AccountsĪ money market account is also an option if you’re interested in snagging a better interest rate and you’d like to have check-writing capabilities. The other advantage is that fees may be lower since online banks typically have fewer overhead costs. Online banks tend to offer slightly higher rates, however, so if you’re not dead-set on the idea of being able to access your money by walking into your local branch, you could see a little more growth. The problem is that the amount of interest you’ll earn is practically nil. Sticking your cash in a traditional savings account is one of the safest ways to go if you’re not comfortable exposing your money to a high degree of risk.
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