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Author: jsuomi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 25234  
Subject: Emergency Savings vs. Maximizing 401K Contrib. Date: 10/9/2002 5:48 AM
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I'm concidering decreasing my 401K contribution in order to increase my savings account balance. This account is used for emergencies only (e.g. layoff, medical, etc.).

I'm contributed the maximum ammount (16%) of my monthly salary and my employer matches with 4%. I'm investing in a ML S&P500 index fund (Ticker mdsr.x).

Presently, I only have ~1 month of my monthly salary saved. With today's economy, I'd feel more comfortable with 6 months on hand. Is is Foolish to decrease my monthly 401K contribution in order to accomplish this?
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Author: BookmFool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15389 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 7:06 AM
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Greetings jsuomi:
Presently, I only have ~1 month of my monthly salary saved. With today's economy, I'd feel more comfortable with 6 months on hand.

And IMHO, what one is comfortable with is most important. I've read articles that discuss having as much as 6 months of living expenses stashed away, so that's not at all excessive. But that is certainly on the maximum end of the scale. The average seems to be around 3 months, from thinking of all that I've seen discussed. But again, if 6 months lets you breath easier, then that should be your goal.

Decreasing ones regular 401k contribution is a subject I'm hearing more often as of late. Not wanting to contribute to poor performing mutual funds (or fund) makes sense. But being that you're contributing to an index fund (and not one of the better ones IMHO), you're betting against the market(or the S&P500), after it has already lost over 40% or so, in the last 2-plus years. Because I'm DCAing (dollar cost averaging) with my contributions, the price that I'm buying my fund shares at in this bear market will be worth that much more when I need to redeem them a few decades from now. I consider myself thrifty, so I don't mind buying when something's on sale (SEE: buying LOW; selling high).

I hope the above makes some sense. Good luck with your decision though.

Bookm

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Author: madmikeyd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15390 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 7:07 AM
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>Is it Foolish to decrease my monthly 401K contribution in order to accomplish this?

Yes, as long as you contribute enough to qualify for the maximum employer match.

Cheers,
madmikeyd

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Author: splotto Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15391 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 9:43 AM
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JS:

I might be in the minority in here, but I think now is a great time to be buying. I think that all the purchases your 401k is making since July will payoff nicely 2 years from now. I have actually increased my contribution and I have been buying many of my DRiP stocks during this blue light special.

If you walked into your local store and discovered that a box of Band-Aid's were half price, would you not buy them? No. You would be happy they were on sale.

Clearly the analogy assumes that the Band-Aid's are the same product that they were when selling at full price. Some of the stocks out there are on sale because of real trouble. However, when we are talking about a total market index or an S&P 500 index (or quality stocks that are undervalued) you are still talking about generally the same companies.

You might consider not changing your contribution, but trying to lower your expenses elsewhere in your budget to add to your reserve. Don't forget, while it is not the best possible choice, your 401k funds are there if you have a REAL emergency (like being faced with losing your house or something).

Splotto


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Author: TurkeyBreath Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15392 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 9:46 AM
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I'm concidering decreasing my 401K contribution in order to increase my savings account balance. This account is used for emergencies only...

Since it's for emergencies only you may consider allocating your 401k money within said 401k to cash. Most 401k's have a cash portion. My 401k cash option pays 5% interest. Accumulate your 6 months plus 10% penalty plus tax cost. You'll have your emergency money earning tax free interest until and if you must withdraw.

TB



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Author: JDOyster Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15393 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 11:36 AM
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jsuomi: Presently, I only have ~1 month of my monthly salary saved. With today's economy, I'd feel more comfortable with 6 months on hand. Is is Foolish to decrease my monthly 401K contribution in order to accomplish this?

An emergency fund is a very Foolish thing to have.

Ideally, you should be able to economize elsewhere and build up an e-fund while still maxing out your 401k contribution [and, perhaps, adding an IRA contribution as well!]. However, I don't know your finances, so I can't say whether that's realistic.

My gut reaction is that you don't want to cut back so that you lose matching funds. How much are you talking about cutting back on your 401k contribution and how much (if any) matching funds would you lose?

splotto: I might be in the minority in here, but I think now is a great time to be buying.

I agree...the S&P 500 is nice and cheap right now. But just because it is cheap right now doesn't mean that it is the best use of jsuomi's money.

TurkeyBreath: Since it's for emergencies only you may consider allocating your 401k money within said 401k to cash. Most 401k's have a cash portion. My 401k cash option pays 5% interest. Accumulate your 6 months plus 10% penalty plus tax cost. You'll have your emergency money earning tax free interest until and if you must withdraw.

That depends on the nature of the emergency---most plans do not permit in-service withdrawals. Your plan might work if the emergency is a layoff, but not if the emergency is, say, an unexpected car repair. Also, if the employer goes bankrupt, the 401k assets may be frozen for several months while the plan is audited, and thus be unavailable until the audit is complete.

Botttom line: 401k assets aren't the same as cash.

Good luck,
JDOyster


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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15394 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/9/2002 5:01 PM
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Since it's for emergencies only you may consider allocating your 401k money within said 401k to cash. Most 401k's have a cash portion. My 401k cash option pays 5% interest. Accumulate your 6 months plus 10% penalty plus tax cost. You'll have your emergency money earning tax free interest until and if you must withdraw.

If you are in an emergency do you really want to have to hassle with tax penalties from an early withdrawal?

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Author: jsuomi Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15395 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/10/2002 8:26 AM
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Thank you all for your replies!

JDOyster: Ideally, you should be able to economize elsewhere and build up an e-fund while still maxing out your 401k contribution...

This is one idea that crossed my mind, but it will take some time to build-up an e-fund. I would feel better if I could build it up in the next year. Presenlty, I only have about 1 months salary in savings. I've been paying down my debt and almost have it paid off!)

JDOyster: My gut reaction is that you don't want to cut back so that you lose matching funds. How much are you talking about cutting back on your 401k contribution and how much (if any) matching funds would you lose?

I was thinking about a cutback to 6% (from 16%). I won't lose any matching funds as my employer matches all contributions from 5-16%. This will be a temporary cut-back. Once I have enough money in savings, I would increase the contribution to 16% again.

JDOyster: That depends on the nature of the emergency---most plans do not permit in-service withdrawals...

I don't have a cash portion for my 401k. I'm able to take a loan against my 401k up to the equivalent of 4 months salary. It has an interest rate of 7.5%. I don't really want to depend on this due to the things I've read on this site such as having to repay the amount immediately if I were to lose my job.


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Author: JDOyster Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15396 of 25234
Subject: Re: Emergency Savings vs. Maximizing 401K Contri Date: 10/10/2002 9:23 AM
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I said: Ideally, you should be able to economize elsewhere and build up an e-fund while still maxing out your 401k contribution...

jsuomi replied: This is one idea that crossed my mind, but it will take some time to build-up an e-fund. I would feel better if I could build it up in the next year. Presenlty, I only have about 1 months salary in savings. I've been paying down my debt and almost have it paid off!)

As I said, I don't really know your finances, but if you've been paying off debt and are almost done, how much can you save by redirecting some of that debt repayment towards savings? Also, are there little things (like brown-bagging lunch) that you can do that would save a few bucks? You might be surprised how quickly $20 a week adds up to real money!

No matter what you do, it will take time to build up a 6-month reserve fund. Even 10% of your salary only corresponds to a little over 1 month's of salary saved per year (!). By the way, I've heard it expressed as 3-6 months of living expenses [not necessarily salary] for an e-fund, so you might be further along than you think.

jsuomi added: I was thinking about a cutback to 6% (from 16%). I won't lose any matching funds as my employer matches all contributions from 5-16%.

These two sentences sound contradictory to me, so let me rephrase my point:

The 4% your employer contributes to your 401k on your behalf is the only contribution they are making towards your retirement. Essentially, this is free money to you. You shouldn't cut back your 401k contribution to the point where they give you less free money in the coming year. Take every dollar they are willing to give you.
jsuomi commented: I'm able to take a loan against my 401k up to the equivalent of 4 months salary.

You really shouldn't keep your emergency fund in your 401k.

Good luck,
JDOyster

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