No matter how much we try to plan for the future, life is always guaranteed to throw some curveballs our way. Many of these curveballs can cause us to need to come up with money rapidly. This is why having cash available with little notice is so absolutely vital.

I previously discussed reasons why an emergency fund is so important. This article is about how I think about funding any potential emergencies that come my way.

To start, I’m going to list all of the layers in my emergency plan, and then I’ll explore each in more detail.

My Emergency Fund Layer Cake

1. Credit Card + Checking
2. Credit Card + Savings
3. CDs
4. Brokerage Accounts
5. Roth IRA

1. Credit Card + Checking

It may seem a little strange to see an emergency fund discussion start with the mention of using credit cards, but I’m a strong advocate for the responsible use of credit cards for any spending that allows their use. Credit cards provide reward points that can be used for travel or as statement credits, and they provide extra payment protection in case a merchant overcharges you (or does any other funny business).

I’m typically able to handle small emergencies by putting purchases on one of my credit cards, and then paying the card off in full using money that’s already in my checking account. Since I keep a cash buffer in my checking to prevent against overdrafts, I have enough to cover a few hundred dollars without needing to even touch any of my savings.

2. Credit Card + Savings

For larger emergencies, I still start by using my credit card if possible, and then transfer money from my savings into my checking to pay off the balance. For example, I recently had to replace my furnace, and this was decidedly not spending that I had planned for. I put the entire purchase on a credit card, which netted over $80 in rewards (or to think of it a slightly different way, instantly gave me a 2% discount). I then transferred money from my savings account at Marcus into my checking, and paid the card off at the next statement.

3. CDs

Last year, I decided to move some of cash from my savings account into a CD ladder in order to realize slightly higher interest rates. I would potentially lose a small amount of principle for accessing them early, but this would be fairly negligible compared to my other options.

4. Brokerage accounts

I have two brokerage accounts that have no limitations around when I sell. Both of these are invested fairly aggressively in almost all stock, which means there is significant risk if an emergency occurred during a market downturn.

5. Roth IRA

Finally, one of the many great features of the Roth IRA is the flexibility to withdraw any of your own contributions at any time. Unlike the severe penalty incurred when tapping a 401(k) early, the only loss to taking Roth IRA funds early is the loss of those dollars in retirement (along with any earnings they would have generated). This source is not preferable, because you are effectively stealing from your future self, but it’s nice to know that this is at least an option (I do strongly suggest keeping this at the bottom of the list).

Key Takeaways

• Try to create multiple layers of money that could be utilized in the case of different kinds/sizes of emergencies.
• Use credit cards responsibility when emergencies come up – just make sure to pay your cards in full.
• As you grow your portfolio, brokerage accounts and your Roth can act as additional layers of emergency protection.