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Financial Planning / Foolish 401(k)s


Subject:  Re: Emergency Savings vs. Maximizing 401K Contri Date:  10/9/2002  11:36 AM
Author:  JDOyster Number:  15393 of 26270

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,

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