The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: RiskDown on July 13, 2014, 02:44:59 PM
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I want to build up a 10k emergency fund, for things like house roof, major car repairs/used car replacement, 6-months job loss, etc. FWIW, I don't have enough equity in my house yet, for HELOC.
What is the best type of account to do this with? My initial thought in the topic is no savings, and just use my companies 401k loan if something comes up, but I wouldn't be able to leverage that money if I lost my job... so thinking that's not really a good option.
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If you don't have access to a HELOC and this is truly an emergency account, I would recommend just a savings account. You could possibly look into maxing your Roth IRA with some of this money and holding a less volatile asset (e.g., bonds). There's still risk, but it's limited. Personally, once I decided how large my EF fund would be I had no qualms with leaving it in a savings account. It helps me sleep at night knowing it's liquid and "safe."
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What is the best type of account to do this with? My initial thought in the topic is no savings, and just use my companies 401k loan if something comes up, but I wouldn't be able to leverage that money if I lost my job... so thinking that's not really a good option.
Not to mention -- if you do leverage that money and THEN lose your job, you either have to find a way to repay the loan in full very quickly (usually within a couple of weeks, though some places may give you up to three months) or the remaining balance becomes a "deemed distribution" and subject to income tax + penalties. And taking on the obligation of a loan payment after you've had your first emergency is just begging our friend Murphy to scrounge up a second one for you shortly after. All this aside from the irretrievable reduction in balance-at-retirement.
A 401(k) should never be your emergency fund. Part of my job involves taking phone calls from people who have no savings outside of their employer-sponsored plans. The stories I hear... people crying, and I'm trying to help them, be sympathetic, offer options, but I'm also always a little tempted to reach through the phone and punch them in the face... please don't be one of them.