The “Emergency Roth” Fallacy

In the last year, a dangerous fad has taken root in mainstream personal finance theory that I’ve dubbed the “Emergency Roth” (trademark pending). The basic premise is to use a Roth IRA to save an emergency fund. I don’t know where it originated, but this idea is being parroted by many herd-following financial writers (see the list at the bottom of this post). But as is often the case with these trendy financial sound bites, the inconsequential upside is being loudly touted while the potentially huge downside is completely ignored.

Roth no equal EF 2Before I break it down, I’ll let Erik Carter at Forbes.com (“10 Common Money Management Mistakes That You’re Probably Making”) explain the basic concept:


“One of the best places to start [saving for emergencies] is in a Roth IRA. That’s because whatever you contribute to a Roth IRA can be withdrawn tax and penalty free for any reason at any time and whatever you don’t withdraw grows to be tax free after age 59½. This way you can build an emergency fund and save for retirement tax free at the same time. Just be sure to keep the money invested somewhere safe and accessible like a money market account or fund until you have adequate emergency savings elsewhere.”


Too Good to be Intelligent: There are four major problems with this strategy:

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The entire purpose of a Roth IRA is to grow your investments free of taxes. Who cares about saving taxes on an account earning 1%!? You can only save $5,500 per year per person into a Roth IRA ($6,500 over age 50). At 1% interest (above average for a money market) that’s a whopping $55/year which — at a 25% tax bracket let’s say — results in an annual savings of $13.75…THIS is their big game changer?

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Yes, you can access contributions into a Roth without penalty at any time, but when you do an insidious and overlooked trap closes on you: Once it’s spent, that year’s contribution limit, and tax-free growth potential, are gone. Emergencies happen, and if this is your emergency plan, you will tap into it.

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So now we know the benefit is almost negligible, and you can’t replace money you pull out. Those are bad, but at least it’s complicated and vague! None of these authors tell you how this works in your overall plan, but after reading several of these, I have an inkling of what the end-to-end process should be:

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Header 4
So it’s ineffective, complex, and vague, and its success (paltry as it is) hinges solely on repeated manual intervention. For the average American worker with Roth access, that’s just not going to happen. First, the idea assumes there will be money left (just earmarking the funds for emergencies makes that less likely than if it were earmarked for retirement). Second, it assumes the person will be proactive enough to set up additional, non-Roth emergency funds later, and THEN remember to come back and change the investments in the Roth to reset it for retirement. It all adds up to a lot of work, and unnecessary risk, for almost zero upside.

A Conga Line of Dumb: Saddest of all, the trend is growing: Money Magazine, US News, Forbes, The Wall Street Journal, Investopedia, the Seattle Times,  and even Suze Orman (in her most recent PBS special) are now championing this nearsighted tactic (a short list is below, there are many more). I have to wonder if their jobs are to simply read and regurgitate from some common financial feed like lab mice at a pellet dispenser, or if they are  so desperate to put out something, anything new that they don’t bother to critically examine a new concept, instead jumping on any bandwagon with both feet to beat the next three sheep in the flock to print.

The Bottom Line: Yes, there is an infinitesimal mathematical benefit to be gained with this tactic, but it trusts to multiple steps of manual intervention for the follow-through to make even that pittance work. More dangerously, it gives the illusion of doing two smart things at once (saving for emergencies and saving for retirement), but at the result of doing both of them poorly.

My recommendation — as usual — is to keep things simple: Save first for emergencies in a savings account or money market, and STOP when you have enough (3-6 months of expenses). THEN start investing regularly for growth in your Roth IRA, 401(k), and/or other tax-advantaged options available to you. Oh, and get out of debt before you worry about retirement investing. The fact of the matter is that the number one reason people raid their retirement accounts is DEBT, with emergencies as a close second (TIAA-CREF,  “Should You Borrow From Your Retirement Plan?“). So becoming debt-free and building an emergency fund isn’t just a great way to reduce stress and instability from your finances, it’s bona fide retirement insurance. And that’s not a product you can buy, it’s a foundation you build for yourself and your family.


Article List:

  1. Money Magazine, July 2015 issue: “Never Worry About Money Again” (p. 44, under Put Your Roth IRA on Double Duty) by Carla Fried, Ian Salisbury, and Taylor Tepper
  2. Forbes:10 Common Money Management Mistakes That You’re Probably Making” (under mistake #5) by Erik Carter
  3. US News & World Report MONEY:Can a Roth IRA be Your Emergency Fund?” by Miranda Marquit
  4. WSJ:Keep Emergency Fund in Cash or Invest?” by Andrew Blackman
  5. Seattle Times:Roth IRA can be a backup emergency fund” by Gail MarksJarvis
  6. Investopedia:How To Use Your Roth IRA As An Emergency Fund” by Amy Fontinelle
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Five Year House-iversary!

I’ll start this post off with two words I’ve been waiting a long time to say. They aren’t the BIG words we’re looking forward to (that being “D-E-B-T-F-R-E-E”) but they’re mighty important all the same. Those words are; “Four Digits”. As of our July 1 payment, our mortgage is below the hallowed $10,000 mark at last!

Happy Little Roadblock: This month was our original goal for paying off our home, but as I wrote in our Four Year House-iversary post, finding out we were expecting in April last year made us decide to slow things down a bit as we prepared for the added expense of a new baby (or the “happy little roadblock” as I called it) and the reduced income of Courtney moving to full-time mama. But that’s the thing about goals; goals exist to motivate you and help keep you on track, but they shouldn’t cause you stress if the honest need arises to shift them. We set a new goal to finish paying off the mortgage by the six year mark (July 2016), but it looks like we’ll probably hit it this year!

It’s NOT About Income: We get asked a lot; “How are you doing this?! NO ONE pays off their house that fast!!” If we weren’t already doing it, I’d ask that question myself. It almost seems unreal to me, something only “rich” people do, but that definitely isn’t us! We haven’t won the lottery or received an inheritance. We make good but not huge money (our combined incomes total under six figures). I believe anyone can do this if financial freedom is on your bucket list. But nothing this big happens accidentally, and pure discipline won’t cut it. Motivation trumps willpower, and a plan gives that motivation a track to run on:

  1. BlueprintThe Plan: We purchased our home in July of 2010 on a 30-year, fixed rate mortgage. Being debt-free in five years gave us a finish line of July, 2015. Beginning with that end in mind, I ran the Amortization Calculator on our bank’s website to see how much extra per month and per year we’d need to average to meet the goal.
  2. gear-hiThe Process: With the big numbers in hand, we could calculate our monthly budget precisely, making cuts as needed. With the average monthly amount figured out, I use the bank’s online portal to make our payment and add the extra to principle (it would work the same with a physical payment book), always striving to hit above the average to give us extra cushion for lean months.
  3. Thermometer narrow 2The Motivation: It was daunting to think about making triple or quadruple payments (our largest to date was NINE TIMES our monthly principle and interest!) every month for five years. So for extra motivation, I write these “House-iversary” posts each summer (see Year 1, Year 2, Year 3, and Year 4 if you’re curious) to keep us accountable and celebrate milestones. Courtney even created a physical “Mortgage Thermometer” to hang on our refrigerator that lets us peel off the debt as it’s paid.

Show Me The Payments! “That’s all nice in theory,” you say. “But what about the MONEY? How were you able to make those massive, budget-cracking PAYMENTS?!” As I said, we don’t make huge money, but three fundamental steps made it possible while still having a life:

  1. Debt-Free NeonGet Debt-FREE: We were totally debt-free before we bought the house. By eliminating all other debt, our income was set free to apply to our big goal. Removing the debt also gave us the flexibility to roll with any emergencies that came up without jeopardizing making our mortgage payment. And that’s a nice feeling when you’ve got a 30-year debt hanging over you!
  2. bag_of_moneySave BIG: We saved up a 20% down payment. A large down payment meant our interest rate was lower, our monthly payment was smaller and – by making it 20 percent specifically – we didn’t have to pay Private Mortgage Insurance (PMI) which, for those not familiar, is the homeowner ensuring the bank for their mortgage. No thank you.
  3. house money 2Buy SMALL: We bought a conservative home. Our base payment is just 20 percent of our combined after-tax income, including taxes and insurance. Sure, we got approved for twice as much, but a less expensive house ensured the payment would be one we could make easily, and double up on without trouble.

And that’s it, no tricks! In a nutshell; we envisioned our goal, set the stage for success and created a plan, and then proceeded to live it every single day, setting milestones and motivators to keep us on track. Stay tuned for the big payoff, coming THIS FALL!

By Andrew

The Disclaimer: Remember, this goal is just one step on our overall financial plan— one that took us years to accomplish. I do not recommend paying extra on your house until/unless you have gotten rid of all other debt (yes, including ALL student loans and car loans), have a comfy cash emergency fund (three to six months of expenses is good), and regularly contribute to retirement and kids’ college funds (if you have kids). Until then, the tax deduction on mortgage payments and the low interest rates push it to the end of your fiscal priority list. (PS – If that sounds like a concise summary of Dave Ramsey’s Baby Steps, you are an astute reader!)

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Star Wars Day Lessons From Dave “Yoda” Ramsey

In honor of May 4th, Star Wars Day, I thought it would be fun to tie Dave Ramsey — our financial “Yoda” — to The Force, Wookies, and blowing up the Death Star.

Dave 'Yoda' Ramsey 2 (glow)

Beware the “Debt Side”: Debt is like the Dark Side of The Force; it’s a tempting shortcut to get what you want quickly and seemingly easily, but it’s fraught with danger and the possibility of losing control. Debt only works when everything else works out perfectly, and how often does that happen?! Plus, debt can destroy retirement accounts faster than the Death Star blew up Alderaan!

Find Your Chewie: Han Solo’s furry friend Chewbacca epitomizes the loyal, supportive companion, just like a good financial accountability partner. Find someone who understands what you’re doing, and will help you stay the course when you’re in danger of straying. They should be willing to “hurt your feelings for your own good”…but let’s draw the line at pulling the arms off of droids who beat them at chess!

Blow Up Your Budgetary Death Star! In The Total Money Makeover, Dave talks about his great-great-grandfather who worked as a logger. Sometimes when the river was jammed up with logs, the workers would literally dynamite the mess, sacrificing some trees to get the rest moving again (read the full Logjam Excerpt here). If you are having a hard time finding room in your budget to pay off debt or save, think about what “dynamite” you might need to throw. Cancelling cable, downgrading cell phone packages, or maybe having a big garage sale or opening an eBay store are places to start. If want to take it to the next level, you might sell a too-expensive car and buy a beater or take public transit or — the thermal detonator of budgetary bombs! — sell a home you can no longer realistically afford and rent cheaply for a time. It’s up to you, just remember that the more deeply you sacrifice, the more quickly you’ll start to win! For those of you interested (or already on Dave’s plan) use Dave’s Recommended Percentages worksheet to see where your expenses might be out of balance, and give you some ideas of where to start.

by Andrew

Note: originally posted in my employer’s SmartDollar wellness blog.

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Curtains and Calzones: Baby Prep

Though we still have roughly 7 weeks to go before Baby arrives, I can’t seem to stop preparing for their arrival. I’m on a roll and pregnancy can’t stop me now! On top of the continuous nursery prep, I’ve decided to plan ahead and make as many meals to store in the freezer as my increasingly sore feet will allow. Many of you know Andrew and I are not inclined to eat out very often due to frugality and overall deliciousness that a homemade meal can only provide.

After sewing curtains for 3 out of 5 windows in baby’s room (NO PATTERN REQUIRED!), I decided to make 8 Broccoli and Cheese Calzones with homemade pizza dough (dough recipe courtesy of Sister), perfect for my freezer meal needs.

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Over the past few weeks, I’ve also made 6 Primavera Lasagnas…

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6 Mushroom, Spinach and Onion Quesadillas…

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And a big batch of my famous Vegan Quinoa Chili (not pictured). All of these freezer meals will make life (and food prep for Andrew) a little easier AND we won’t have to eat out too often to get the necessary nourishment we’ll definitely need for what’s to come.

Tomorrow’s agenda: finish remaining curtains in Baby’s room and make two 9.5″ Spinach Pies for freezer!

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by Courtney

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Four Year House-iversary!

Whenever we’ve talked with folks about our ambitious 5-year plan to pay off our 30-year mortgage, we always qualified it with a statement along the lines of the following: “Yeah, the mortgage payoff is going well, we’re on track/ahead of schedule. Of course, if we have a kid that would probably change things a bit.” Well, I’m glad to say that happy little roadblock has come to pass!

Baby vs Mortgage

Since our Three Year House-iversary post this time last year, we had been making phenomenal progress on our payoff scheme and were tracking to have the house paid off before the end of 2014! Once we found out we were expecting – after a few hours of high fives and Snoopy-dancing around the house – we decided we would take our foot off the gas a bit on the house, save a little “baby fund” for anything unexpected, and take care of a few house projects that made sense to get done before our little bundle o’ joy arrived (like fully scraping and painting the exterior of the house).

So we’ve slowed things down, but what does that really mean? As always, let’s go to the numbers!

The Year in Dollars: Since last July, we’ve paid $38,334 on the principle of our mortgage alone (i.e. not counting interest, taxes, and insurance); by far our biggest year ever!

The Payments: Not surprisingly, that means some massive payments. Prior to the baby news, we had made our biggest payment to date in February 2014 (8 times principle & interest)…until the next month in March when we did it again, paying NINE times principle & interest! Since then, we also made our smallest ever, a measly $200 extra. But without fail, we’re putting something above our mortgage each month. It just wouldn’t be us not to!

The Running Total: As of July 2014, the end of our fourth year of homeownership, we’ve paid just over 26 years off our mortgage.

So what’s next? The biggest shift comes to our income. We always planned, when a baby came into the picture, for Courtney to stop working (a stay-at-home parent is something we both believe in, and I like working more than Courtney, bada boom). Part of that plan included running our household on a small budget, leaving us lots of financial ‘oomph’ left over: first to let us save and make big honking mortgage payments, and now to make it easy for Courtney to gracefully shift to part-time business owner and full-time mom.

Mortgage Payoff 2.0! With our fabulous MVP Health Care insurance and a fully-funded HSA, we’re good to go on our medical costs for everything baby – phew! Ratcheting down the mortgage payments lets us meet all our bills on just my income, with enough left over for a baby-sized boost to our cash savings; funds for our last few house projects; and our new, slightly adjusted mortgage goal: to pay off our house by our SIX Year House-iversary, July 2016. It’s not quite as crazy as five, but it sure beats the pants off 30!

A few of our friends and relations have (lovingly) accused us of being a little too focused on money these last four years. But actually, it’s quite the opposite. Having the freedom for one of us stay home with our children – and for the other to work without bringing home the stress of debt and a tight budget – is worth just about any short term sacrifice to us. But the crazy thing is; the cost hasn’t been that steep! We don’t take expensive vacations, but we take long weekends to Boston or New England each year and our low-cost honeymoon was affordable AND unforgettable. We don’t drive fancy cars (quite the opposite) but we get around safely and reliably. And while we have plenty of fun “stuff”, as you saw in Courtney’s last post anything we don’t get full value from we sell to someone who wants it more (though some sales were tougher than others) and put the money toward our dream of family peace and financial freedom. And after years of dreaming together, we’re very much looking forward to including one more little dreamer into the mix!

by Andrew

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Ringing in the New Year (with an extra $1,593.60)

by Courtney

n 2013 we continued purging unnecessary “stuff” taking up space and collecting dust.  After having a joint garage sale with my sister and her husband over the summer, we really kicked it into high gear and decided that enough IS enough.  And as I’ve been reading several books on my Kindle (FREE books of course) about a minimalist way of life, I’m really on a roll with selling the “stuff” that has no purpose in our lives.  Here are the many ways we’ve earned some extra cash in 2013.

GARAGE SALE – $150  After making a few bucks at our joint garage sale, we really dreaded packing all of the extra loot into our cars to bring to The Salvation Army.  So instead, we brought the more valuable things into the house that we knew we could get some money for and placed the rest at the bottom of our driveway.  By the next morning, everything but the wicker flower pot and retro suitcase were gone…phew!  And I kept the suitcase.  Score!

SECONDSPIN.COM – $44.03  Secondspin is a great online source to get rid of your unwanted DVDs, CDs and video games that you pay no attention to.  After entering the UPC code of your items into their system, you can choose to add the item to your selling cart which keeps a running total of how much you will make.  Note: Your items have to be in near perfect condition; no scratches, damage to inserts, etc.  If you ship your items by Media Mail, Secondspin will reimburse you for shipping.  A nice and easy way to clear some clutter!

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You don’t need to hold onto this one, people.

AMAZON MARKETPLACE – $168.20  Selling on Amazon is so easy.  Unlike ebay, you don’t have to take pictures of your items, but only leave an item description.  We’ve sold many books, DVDs, CDs, and video games through Amazon.  They will periodically deposit your earnings into your linked bank account of your choice.  They take a portion of each sale, but give you shipping costs.  Not a bad deal!

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Andrew got this game in an XBOX 360 bundle on Black Friday. Along with another game, we made money off of games that were essentially FREE!

Craigslist – $215  This is great for high value items or huge, bulky items that you wouldn’t sell on ebay.  It’s very easy to take pictures and upload them to a post with details about your item, AND it’s anonymous.  If a buyer wants to bite, they contact you through an anonymous e-mail that Craigslist generates, but it arrives in your chosen inbox.  We’ve sold things like golf clubs, exercise equipment, electronics and even Andrew’s car & motorcycle.  (BONUS: Andrew’s motorcycle earned us an extra $2,900 in 2013.  It sold within a week of our post…Yay Craigslist!).  For the most part, I did most of the anonymous communicating with buyers, while Andrew met them in the Shop Rite parking lot IN BROAD DAYLIGHT to finalize the sales.  People scare me.  You never know!

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Farewell to a fun ride.

EBAY – $1,016.37  Although ebay takes time to use, it’s worth it.  Yes, I have to take pictures of my item, describe its condition and do a little research to find out what it might be worth to then decide what I’m going to sell it for, but it made us an extra $1,000+!  On ebay, you can either sell your item at auction style and come up with a starting bid OR you can sell it at a fixed price and hope someone buys it for exactly what you want for it.  The nice thing about ebay is that you can sell ANYTHING.  This year, we sold many vintage and retro toys, video games and paraphernalia that were taking up real estate.  You’re welcome, mom!

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Goodbye, Rainbow Brite

2014 is a new year with a fresh start.  Sell your things!  What are they doing for you, anyway?

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Special thanks to all you nerds out there who are buying all of Andrew’s retro PC games and manuals.

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That “Slap in the Face” Moment

by Andrew

In old movies, you’ll often see a character raving or crying hysterically in some stressful situation, at which point another character calmly draws back and slaps the first person across the face. The hysterical character immediately calms, and is then able to see their situation clearly and begin to take rational action. This happens in real life as well, though usually the “slaps” are less literal.

slap

They can take the form of unexpected revelations from family or friends; a rejection from a job or college (or dating prospect) you thought you had locked; a powerful book, poem, or article; a bank statement or collection notice; a report card or job review; or something as simple as a long-overdue look in the mirror. Whatever the form, a “slap in the face” moment can alter the landscape of your thinking in profound ways. It might even change your life.

I’ve been promising for a while to tell the story of my own financial recovery (this is just my story, Courtney had no debt and good savings when we met). It starts with a slap in the face moment shortly after I turned 30. I’d been living with one of my oldest friends at the time; we’ll call him “Jack”. To give you the full scope of the situation, this time was the absolute lowest point of my life financially. Deep breath, here goes…

  • I was broke with around $50 in the bank, no savings, and no retirement.
  • I had a combined total of $55,000 in debt from credit cards (most of which were maxed out), a brand new car note, student loans, and some personal loans and credit card cash advances.
  • I was making about $12/hour.

With those numbers, it’s no surprise I was frequently late or short with my share of the rent or other bills.

One day the dam broke and we got into a loud argument about my habitual delinquency. Things got heated as I made excuses and rationalized, until finally Jack spoke me some hard truth, the kind only good friends can give. He said; “This is why you’re 30 years old and don’t have a pot to piss in!”

Just like a character in one of those old movies, I was stunned. The fight stopped abruptly and we stared at each other. I felt as though he’d thrown a cold glass of water in my face, and that chill slowly dripped down my spine.

All the excuses, self-negotiating, and rationalizations I’d indulged in for years to avoid responsibility as my life slowly crumbled fell away in an instant. In that moment I saw that I was 100 percent responsible for the choices that had led me to my present circumstances: broke and utterly desperate. I felt tremendous regret over my past decisions, was terrified of my present circumstances, and in despair about what I saw as a hopeless future.

I couldn’t speak. I just gaped at my friend for a long moment, then turned and walked away, and out of our apartment. Days later, Jack apologized for being so harsh but I just thanked him for his honesty.

I didn’t know a thing about personal finance, but I knew I was in a horrible mess. It was tempting to just throw up my hands and say it was too big a problem to do anything – heck, I’d been doing it for years. But when I considered all I might have ahead of me, how could I not fight for a better future? The rest of my life was at stake! I knew I would gain nothing by doing nothing, but I could change my life if I was willing to learn and make better choices.

It all ties in to a powerful quote (I’ve mostly seen it attributed to Thomas Jefferson) I heard around that time: “If you want something you’ve never had, you must be willing to do something you’ve never done.”

And that’s how I woke up. I’ll continue the story in my next post; what I started doing and how I put a plan together. But that figurative slap in my face was what re-introduced me to hope. It was so unfamiliar I almost didn’t recognize that warm, uplifted feeling in my gut for what it was!

Have you had a slap in the face moment in your own life? What people or things have had that effect on you, and what changes have you been inspired to make?

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