But, I’m not sure why Jeffb161 calls it tax free? The earnings are eventually tax free, if you follow those rules. But the money used to establish the Roth is from your income, after taxes.

Jacob’s approach is only as risky as 1)your discipline in not using readily available credit and 2)possessing assets that can be turned into cash quickly. I am a financial planner by trade and I do the same thing he does. I just prefer not to have idle cash unless I’m holding it intentionally due to market buying/selling. The key lies in being honest with yourself about your own tendancies.

I agree with dboy and deegee that both should be used – there should be a layer. I have a modest Efund and if I had to collect unemployment, that check would cover my weekly expenses and then some. However, if a medical emergency came up, etc. I would then have 10grand to use without starting a hill of debt with credit cards and no confirmed job in the future.

I call it ‘preventative management’ instead of ‘crisis management’

But if you have excess, it’s generally advisable keep your money in whatever form nets you the most such that it’s still accessible within a month. Although do be cognizant of risk, if your emergency fund is in stocks, you might force you to sell low (or sell with profit at short term gain tax rates), and end up costing you.

Generally I look at CDs because you can usually just use long term (3-5yr) ones. This nets you the best rate, and often they only charge you a few months interest if you break it early. Often the interest spread is enough that holding for 6 months or longer gets you better returns than a 1 year, even after penalties.

I believe that the Roth IRA is the best place that one can park emergency savings. Just continue to add back to the emergency fund the next year.

For example, my most liquid and least costly funds available are those in my checking account which exceed what I need to meet my minimum balance requirements. I like to keep this “buffer” at least $1,000 but if that amount drops a little from time to time (especially near the end of the month) that is okay. If I drop below the minimum balance amount I will have to pay some small fee per month (maybe $10, I am not sure), so the cost is not a lot. I also have an overdraft line of credit on the checking account so the balance can go negative without penalty.

After that, I have two bond mutual funds which have checkwriting privileges, so I can tap into them to immediately pay large expenses my checking account’s excess cannot cover. Jacob, I do find your credit card’s use as a quasi-emergency fund very interesting and I could use its grace period to bridge short term cash flow shortages no longer than 20 or 30 days (as long as I don’t wish to use other sources to pay the bill).

Those bond mutual funds as well as other mutual funds also have electronic redemption privileges which enable me to transfer money into my local checking account but it takes about 2 days. I tapped into those larger funds when I needed to buy a new car 4 years ago.

Because some of my larger expenses are not monthly, I have to do some careful cash flow planning for the whole year so I don’t get caught lacking enough money even temporarily to cover my expenses.

I started trying to have one but since I have credit card debt (and a few real emergencies) it has gone down.

Now I simply put in around $5 a month to it and pay more on the credit cards because I would end up using my credit cards in an emergency anyway.

Anything you do to reduce temptation is a good idea, but that sounds like a different blog entry.

However, you forgot risk. With an cash emergency fund, You pay for the emergency and that’s it.

With a credit card, you are likely put things other than emergencies on your card, Making the balance swell and harder to pay off