Roth or Emergency Fund?

When you’re just starting out on your financial journey, you’re told you need to have an emergency fund, but you also need to start saving for retirement.

How do you handle competing financial goals when you’ve got limited funds?

My Money Blog suggests that you open a Roth and invest in something safe like a money market fund in the post Roth IRA Contribution vs. Emergency Fund Savings.  Then in a year or so, when you’ve added more to your Roth IRA, you can move a portion of the money market into riskier investments.

While this may be a good solution for some, I prefer to have a "mini" emergency fund of $500-1,000, then contribute to a Roth IRA.  I feel better knowing I’ve got some money in an easy to access account if needed. 

I suggest a high interest money market account for your "mini" emergency fund, such as ING Orange Savings.  ING and other online banks are a great source for your emergency funds because they offer good rates and no minimums.

If you have a mini emergency fund, then you can invest your Roth IRA in more aggressive investments - such as stock funds - to meet your retirement goals.

So, while you can use your Roth IRA as an emergency fund, thanks to the flexibility that Roth IRAs offer, I recommend that you have a mini emergency fund before you fund your Roth IRA.