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Investing/Strategies / Retirement Investing
|Subject: Re: need help with retirement investing and debt||Date: 1/24/2014 9:54 AM|
|Author: 2gifts||Number: 74125 of 77228|
This guy http://www.controlyourcash.com/ makes a good argument why an "emergency fund" is a bad idea and is pretty useless advice. Among other things, he says that (almost) nobody has an e-fund, anyway.
I only read a bit of his site, but I don't find his argument that you don't need an emergency fund because you can insure against most things, and true emergencies are really rare to be convincing. If I lose my job tomorrow, I still need a way to pay my mortgage and eat, and I can't insure against that. Unemployment only pays me a very small portion of my pay, so I would need to tap savings. I've been unemployed for 9 months and then another time for a year, and so having enough cash available to continue paying things like our mortgage, COBRA (which was almost as much as the mortgage) and general expenses like food was a pretty big deal, hence why I do still think people should have an emergency fund.
In the downturn of the 1990's, I watched friends and neighbors lose everything and declare bankruptcy when both partners lost jobs and they could no longer afford their houses because they ran out of what little emergency funds they had.
* 401K to get the full employer match (6% = $4,800/yr = $400/mo)
* $1100/mo into a bank account at ALLY or Alliant CU, etc. earning not quite 1%.
* Any excess, into that same bank account.
* When the bank account equals the debt, or when it stops being 0%, pay the debt from the bank account.
* Then put money into long-term non-IRA, non-401K investments. This is your "emergency fund". See the CYC blog.
* ASAP, start a Roth IRA -- even as small as $100. In 5 years you can withdraw what you've put in, tax free. Put $5000 in it as soon as you can. In 5 years from the time you opened it, that'll be your "emergency fund".
I generally agree with your order here, particularly as you cannot go back in time to contribute to a retirement account, and I find an employer match, together with compounding over time, to be too good to pass up.
As far as treating the Roth IRA as an emergency fund, I highly disagree with this. I find that a lot of folks nowadays seem to think of a Roth IRA as an easy place to get money, and I think retirement savings should be just that. Looking at it as the place to take out money for other expenses seems too close to thinking about your house as a four-sided credit card, and I think that sets up bad financial habits.
I much prefer contributing to retirement accounts, and having taxable investments outside of those accounts to have some flexibility on finding funds for things besides retirement. And I still like to have a solid efund for those things that are unexpected and emergencies like losing your job.
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