Author Topic: So much advice on where to park money. Help?  (Read 3323 times)

pminkler

  • 5 O'Clock Shadow
  • *
  • Posts: 35
So much advice on where to park money. Help?
« on: September 05, 2014, 08:47:54 AM »
I've always liked having different accounts for different goals.  The separation is very clear to me and it just makes me feel better.  Lately, I've been reading a lot of conflicting advice on where to keep different 'stashes' for different goals.  MMM wasn't even opposed to keeping an emergency fund in a Roth IRA.  I think I'm just looking for some advice or assurance that I'm on the right path.

I have a few different savings accounts, not really working for me, for different goals.  The different stashes are:

  • House maintenance/repairs: savings account.  I could need this money at any time.  Tenants tend to want a roof, heat and water...
  • Next used car: savings account.  I don't need this money for anything until the current car blows up (5-9 years).  Even more if I continue to bike as much as possible.
  • Trips: savings account.  I just keep $50/mo separate every month, and use it to go on trips with.  Small ones, big ones, whatever it can afford.  Trips are pretty random.
  • Emergency fund: Roth IRA.  I could need this money at any time, so I'm not really sure why I put this here.  I'm a little afraid about it.  MMM commented on a post that it wasn't necessarily bad, since there are credit cards for emergencies...until you can withdrawal from your other accounts...but it still feels somewhat wrong.  No?

I'd really like to put as much money as possible into accounts that will benefit me better.  I'm thinking I should just put the maintenance, car and trip funds into an index fund of some kind.  I can withdrawal from that pretty quickly (1-2 days).  I do like having separate accounts, but I suppose I can get over it.

Having the emergency fund in a Roth IRA scares me, though.  I don't know why I did that.  If I needed to withdrawal from the account, it says "Distributions from contributions are tax free. 10% penalty tax on withdrawals before age 59 1/2, unless an exception applies."  Does that mean that I can take out what I put in, but I still get a 10% penalty tax?  That doesn't sound very good at all for an emergency fund.
« Last Edit: September 05, 2014, 08:49:40 AM by pminkler »

neo von retorch

  • Magnum Stache
  • ******
  • Posts: 3340
  • Location: SE PA
    • Fi@retorch - personal finance tracking
Re: So much advice on where to park money. Help?
« Reply #1 on: September 05, 2014, 09:14:34 AM »
There are various opinions on emergency funds. Having never had to use one, I plan on eventually moving mind into an investment count. (That's the money I'll use to make an exception to "don't time the market.") Because then once it's there, I'll just use credit cards and other more liquid accounts for short term needs. But perhaps there are examples of using an emergency fund for something big that requires cash. (I did have to buy a roof, and this was somewhat pre-mustache so I refinanced my car from a $3k loan to an $8k loan at 1.49% to cover the roof. Felt better than draining my EF.)

The car purchase money sounds like a better candidate for an investment account -- for the next 5-7 seven years. But you might be wise to convert it to a liquid fund while the market is doing well and you still have a solid car underfoot. If the market corrects and you need a car a week later, the fact that you can get your money out in 1-2 days will not be your biggest concern.

I opened a GE Capital Bank Online Savings (0.95%) for my house/repairs and various short-term needs, but you could also consider using SmartyPig.com which is 1% (and works with Mint.com, unlike GE.)

Cromacster

  • Handlebar Stache
  • *****
  • Posts: 1696
  • Location: Minnesnowta
Re: So much advice on where to park money. Help?
« Reply #2 on: September 05, 2014, 09:16:34 AM »
I have a system similar to you.  For most savings goals and emergencies I keep in cash, in separate accounts depending on what it is for.  Except for the car, which I don't specifically save for.  Last car I purchased I sold some shares in order to purchase it.

Having the emergency fund in a Roth IRA scares me, though.  I don't know why I did that.  If I needed to withdrawal from the account, it says "Distributions from contributions are tax free. 10% penalty tax on withdrawals before age 59 1/2, unless an exception applies."  Does that mean that I can take out what I put in, but I still get a 10% penalty tax?  That doesn't sound very good at all for an emergency fund.

No, You can take your contributions out with no fee's or taxes.  The downside is that you can never put it back in (outside the 60 day window you have...I could be wrong on the time frame).  So you lose out on future gains from that chunk of money could have made tax free.

I don't consider my Roth my emergency fund and I would do almost anything else before I tapped into it.  There are different types of emergencies and now the more I think about it I would react differently to each one.  Job loss, medical, car wreck, natural disaster/house damage.  Each one I would take a different plan of attack as to how I would deal with it financially.

pminkler

  • 5 O'Clock Shadow
  • *
  • Posts: 35
Re: So much advice on where to park money. Help?
« Reply #3 on: September 05, 2014, 09:22:52 AM »
I opened a GE Capital Bank Online Savings (0.95%) for my house/repairs and various short-term needs, but you could also consider using SmartyPig.com which is 1% (and works with Mint.com, unlike GE.)

Why not an investment account?  Isn't 1-3 days about good enough for something like this?  If my car broke down, I could bike or work from home.  If my furnace blew up, I could toss on some blankets for a few days (the tenants might not think it's so fun, though).  I'm just sort of thinking that there's no emergency, that will utterly kill you, that costs more than the $7k limit on my main credit card...and more than likely I can cash in some stocks to repay the balance before interest accrues.

pminkler

  • 5 O'Clock Shadow
  • *
  • Posts: 35
Re: So much advice on where to park money. Help?
« Reply #4 on: September 05, 2014, 09:28:12 AM »

No, You can take your contributions out with no fee's or taxes.  The downside is that you can never put it back in (outside the 60 day window you have...I could be wrong on the time frame).  So you lose out on future gains from that chunk of money could have made tax free.

I don't consider my Roth my emergency fund and I would do almost anything else before I tapped into it.  There are different types of emergencies and now the more I think about it I would react differently to each one.  Job loss, medical, car wreck, natural disaster/house damage.  Each one I would take a different plan of attack as to how I would deal with it financially.

Ok, so the principal can be taken out without penalty.  Good to know.  What do you mean by "you can never put it back in"?  Like, for that year?  Say in January I contributed $1000.  In March, I withdraw $500.  Can I not contribute more during the rest of the year?

It's sounding like I might put my goals/savings into an index fund, since I can withdraw from that pretty quickly if need be.  I assume the only downside to such an idea is "what if the market decides to crash right when I need the next car?"

GGNoob

  • Pencil Stache
  • ****
  • Posts: 725
  • Age: 32
  • Location: Colorado
Re: So much advice on where to park money. Help?
« Reply #5 on: September 05, 2014, 09:33:28 AM »
If you wanted to invest it, Betterment fits this situation pretty nicely. Betterment allows you to separate your money into goals. Each goal will have its own name and you will invest it based on when you will need the money. Then when you need the money, as long as you make the withdrawal when the market is open, it will be in your account on the 2nd business day. If you withdraw after hours, it will be the 3rd business day. I assume most emergencies can be put on a credit card anyhow, so immediate access to your money shouldn't be needed.

Otherwise I have a Capital One 360 Savings. It lets me create multiple accounts so that I can separate my money into goals.

FYI, I have referral links to both if you are interested. Just send me PM.

Chranstronaut

  • Pencil Stache
  • ****
  • Posts: 713
Re: So much advice on where to park money. Help?
« Reply #6 on: September 05, 2014, 10:18:00 AM »
Having the emergency fund in a Roth IRA scares me, though.  I don't know why I did that.  If I needed to withdrawal from the account, it says "Distributions from contributions are tax free. 10% penalty tax on withdrawals before age 59 1/2, unless an exception applies."  Does that mean that I can take out what I put in, but I still get a 10% penalty tax?  That doesn't sound very good at all for an emergency fund.

No, You can take your contributions out with no fee's or taxes.  The downside is that you can never put it back in (outside the 60 day window you have...I could be wrong on the time frame).  So you lose out on future gains from that chunk of money could have made tax free.

To add to this thought, I believe you must have the Roth IRA account 5 years before you can withdraw principle.  So you might need to consider another emergency option for the first 5 years of the account.  If I were going to using an investment account for an emergency, I'd probably just use my normal after-tax account and let my Roth keep growing tax-free for the future. 

My strategy is a combination of many things, including keeping some cash and some after-tax investments.  If I had an emergency that wiped out my cash account, then I would divert most future savings there and not deposit into my after-tax investments.  I don't play the "well, what if I have a bigger emergency that I can afford in cash" mind games because that can go on forever and I can't think of an emergency that could occur instantly without payment options and cost that much.  I know that cash on hand + credit card + monthly savings rate is high enough for me to feel comfortable for any short term emergencies.  If I owned a house or had dependents, then monthly savings rate might go down, and/or cash on hand would need to go up to compensate.

neo von retorch

  • Magnum Stache
  • ******
  • Posts: 3340
  • Location: SE PA
    • Fi@retorch - personal finance tracking
Re: So much advice on where to park money. Help?
« Reply #7 on: September 05, 2014, 11:19:59 AM »
I opened a GE Capital Bank Online Savings (0.95%) for my house/repairs and various short-term needs, but you could also consider using SmartyPig.com which is 1% (and works with Mint.com, unlike GE.)

Why not an investment account?  Isn't 1-3 days about good enough for something like this?  If my car broke down, I could bike or work from home.  If my furnace blew up, I could toss on some blankets for a few days (the tenants might not think it's so fun, though).  I'm just sort of thinking that there's no emergency, that will utterly kill you, that costs more than the $7k limit on my main credit card...and more than likely I can cash in some stocks to repay the balance before interest accrues.

Quote from: neogodless
If the market corrects and you need a car a week later, the fact that you can get your money out in 1-2 days will not be your biggest concern.

Example - you put $5000 in an investment account - it gains 7% each of the next two years and is worth $5725. Awesome. But for some reason, there's a 20% correction... it is worth $4600. You need $5000 for a car. You can use $4600 from your emergency fund, or wait 12 months for the market to fully recover.

(This might not be likely but with any investment, there is risk involved. If you need the money at a moment's notice, it's not how long it takes to transfer the money that matters, but whether or not you have the ability to ride out fluctuations in value. A small risk, small reward vehicle for investing such as an interest bearing savings account or money market fund is a safe place to put money that you might need within a week, rather than within "a few years." If the money is, instead, ear-marked for retirement 20 years from now, you can let it grow -- and shrink -- and grow again before touching it.)

Dalmuti

  • 5 O'Clock Shadow
  • *
  • Posts: 27
Re: So much advice on where to park money. Help?
« Reply #8 on: September 05, 2014, 11:22:16 AM »

Ok, so the principal can be taken out without penalty.  Good to know.  What do you mean by "you can never put it back in"?  Like, for that year?  Say in January I contributed $1000.  In March, I withdraw $500.  Can I not contribute more during the rest of the year?


I'm not a veteran poster on this forum, but I am a veteran Roth investor, so I wanted to help clarify the Roth issues.  As was already said, you can take principle out at any time without any taxes or fees.  The 5 year rule only applies to earnings, not principle.  The issue that Cromacster is referring to mostly is an issue with higher amounts than the $1000 you are talking about.  You are correct that you could replace the $500 in your example.  But if you are tapping your emergency fund to cover 9 months of unemployment so you pull $22k from your Roth, it will take you 4 years to replace the money since there is an annual $5500 contribution limit.  The power of the Roth is in having a big principle getting you tax free earnings, but it takes time to build that big principle, so that's why so many people are saying they'd be reluctant to deplete it to deal with an emergency.

As far as where to keep the emergency fund,  I guess it depends on the emergency.  I doubt many people on here worry much about "funds" for those $500-$1000 emergencies since when you are LBYM it's easy enough to divert money temporarily (by delaying an investment deposit or using a CC and then paying off before there is any interest) to cover this stuff and then get back on track.  If you are talking about funds to cover expenses in the case of job loss or other larger emergencies, it makes me really nervous to depend on money that is in the market for stuff like that.  If I lose my job during a market crash, I don't want to be forced to sell low to meet expenses.   

Of course, everyone's situation is different.  When my wife and I were both working at very secure jobs and living off only one of the incomes, I had no emergency fund for covering job loss and slept just fine at night.  I knew the odds of both of us losing our jobs simultaneously was miniscule so I was more than happy to take on the risk of selling at a loss.  Now that she is staying at home and replacing my job would likely require relocating, I want 9 months of expenses in CD's and cash and am willing to take low returns on that money in exchange for the security.