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Financial Planning / Foolish 401(k)s


Subject:  Re: Emergency Savings vs. Maximizing 401K Contri Date:  10/10/2002  9:23 AM
Author:  JDOyster Number:  15396 of 26254

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,
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