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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308444  
Subject: Re: Increased means, how to prioritize? Date: 3/13/2009 7:50 PM
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OK, I'm in the weird position of sort of agreeing and sort of disagreeing with you, AJ. Buying the furniture might be living above their means just in the sense that maybe they couldn't have afforded the furniture, but what is the difference between taking a 0% offer in order to improve your investment ability and taking a 0% offer to live above your means?

There isn't really a difference, which is what my point is. You can live above your means by spending money on investments, on savings, on furniture, on food, or on any number of other things. If you don't have money in the bank or other accessible assets (other than an e-fund) to pay off a non-emergency unsecured 0% loan, you are living above your means. (Secured loans, like mortgages and car loans, are a bit different, since you could theoretically sell the asset to settle the loan, if you had to. But as those who are upside down in secured loans have seen, you may still be living above your means if you can't pay off the differential easily. So be sure you aren't living above your means when taking out a secured loan, your best bet is a large pool of accessible assets and/or a large down-payment, combined with not taking any interest only or negative amortization loans.)

Again, it's a cash flow thing. While the OP may have used some of the dollars for something to help build future wealth, like investing in a Roth before the time limit expired, the fact is that it was spending future dollars to pay for a current expense.

From a cash flow perspective, investment for retirement or saving for an e-fund is just as much of an expense as furniture or food or flat screen TVs are. They all need to be prioritized within your current cash flow and/or savings, or you are spending future dollars. When you spend future dollars, you live above your means.

The other thing I wanted to mention is that not everyone can start out funding their retirement to the extent that they'd like. So, yeah, probably maxing out the 401ks isn't enough, and they need to save up an efund so that the Roths can be purely for retirement, but...I think OP will be able to save more in the future (once he's no longer paying for infant care) and it's good to start out doing what you can. I think putting the efund in a Roth is fine. Buying the furniture, a little eh, but the Roth thing seems fine to me (so long as the OP isn't double counting that money as both efund and retirement, it's fine.)

Oh, I already said that using a Roth as an e-fund as in interim e-fund until you get another e-fund built up, or as a backup e-fund, if you run through your main e-fund and are going to be out on the street otherwise, is a reasonable first step. But there has to be a second step - which is to build up accessible assets that are in non-tax advantaged accounts. Because even if there are no penalties associated with taking money out of the tax advantaged accounts, you still lose the tax advantage on a go-forward basis, and you can't get that tax advantage back once the money's been out of the account for 60 days.

The second step was what didn't seem to be happening in this case, when you compare the amount of money in the Roths vs. the amount of money in the savings/emergency cash accounts. And the contributions to the savings account And if the OP can't find the money to fund an e-fund other than the Roths before the baby comes, what are the chances that it will be able to be funded after the baby comes? Because, as you go on to mention, babies are pretty expensive the first 2 - 3 years. So, taking that second step didn't seem likely to occur anytime soon.

AJ
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