401k Match & Emergency Fund, What Next?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
steve02
Posts: 34
Joined: Thu Jan 10, 2013 12:20 pm

401k Match & Emergency Fund, What Next?

Post by steve02 » Thu Jan 10, 2013 1:50 pm

As mid-20s newlyweds, we are looking for some advice on what to do next. My wife has a 401k, I don't. We currently put away for the full match in the 401k. We currently have 3 months of emergency savings (and would like to get it up to 6 months). What order of the below items should we put extra money towards? Or should we split extra money between certain items? The only debt we have is student loans.

- Student loans at 6.80% (we get a 0.25% deduction on interest for doing direct withdraw). We currently pay the minimum payment.
- Roth IRA for me (invested in Vanguard target date fund - 0.19% ER)
- Roth IRA for my wife (invested in Vanguard target date fund - 0.19% ER)
- Adding to emergency fund to get it from 3-6 months
- Increasing 401k withholdings
- Saving for down payment for a house
Last edited by steve02 on Sun Jan 25, 2015 5:15 pm, edited 2 times in total.

sport
Posts: 6127
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: 401k Match & Emergency Fund, What Next?

Post by sport » Thu Jan 10, 2013 2:01 pm

My suggestion would be to divide the extra money half and half between the student loan and the emergency fund. When the emergency fund is where you want it, I would put as much as I can towards the student loan. That is a high interest rate in today's economy. By paying that off, you are getting a no-risk return of 6.8%. That is not available anywhere else.
Jeff

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: 401k Match & Emergency Fund, What Next?

Post by Bfwolf » Thu Jan 10, 2013 2:06 pm

If you think your jobs are reasonably secure, I'd put everything toward eliminating those student loans. Even with the student loan interest rate deduction (that I assume you qualify for given your low tax bracket), that's a rate that will eat you alive in today's low inflation environment.

steve02
Posts: 34
Joined: Thu Jan 10, 2013 12:20 pm

Re: 401k Match & Emergency Fund, What Next?

Post by steve02 » Thu Jan 10, 2013 2:13 pm

Bfwolf wrote:If you think your jobs are reasonably secure, I'd put everything toward eliminating those student loans. Even with the student loan interest rate deduction (that I assume you qualify for given your low tax bracket), that's a rate that will eat you alive in today's low inflation environment.


Jobs are pretty secure. In that case would you agree with jsl11 and split it half and half?

Also, how would you rate the student loan debt vs. saving for a down payment for a house?
Last edited by steve02 on Sun Jan 25, 2015 5:15 pm, edited 1 time in total.

nwffdiver
Posts: 56
Joined: Mon Oct 01, 2012 9:26 pm

Re: 401k Match & Emergency Fund, What Next?

Post by nwffdiver » Thu Jan 10, 2013 2:57 pm

I agree with JSL, since your job may not be as secure as your wife. 1/2 to the student loans, 1/2 to your EF. Congrats on getting a young start with the Roths.

sport
Posts: 6127
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: 401k Match & Emergency Fund, What Next?

Post by sport » Thu Jan 10, 2013 2:57 pm

scientifics wrote:
Bfwolf wrote:If you think your jobs are reasonably secure, I'd put everything toward eliminating those student loans. Even with the student loan interest rate deduction (that I assume you qualify for given your low tax bracket), that's a rate that will eat you alive in today's low inflation environment.


My wife's job is relatively secure, mine, I'm not so sure. In that case would you agree with jsl11 and split it half and half?

Also, how would you rate the student loan debt vs. saving for a down payment for a house?

That student load is so expensive, you want to get that paid off as soon as you can. Fortunately, it is not too large. So, if you concentrate on that, it should not take too long to get rid of it. Once you do, you will be better able to afford a house. IMO, the only other item on your list that is more important is the emergency fund. If/when you need that fund, you REALLY need it.
Jeff

User avatar
kenyan
Posts: 2861
Joined: Thu Jan 13, 2011 12:16 am

Re: 401k Match & Emergency Fund, What Next?

Post by kenyan » Thu Jan 10, 2013 5:12 pm

Rather than 1/2 to loans, 1/2 to e-fund, I would direct "emergency fund" money to the Roths. If an emergency occurs, you can withdraw your Roth contributions, without penalty, at any time. If an emergency does not occur, then you've expanded your valuable Roth IRA space. If you wish, you can keep that part of your Roth mentally assigned to your emergency fund in low-risk investments such as short-term investment grade bonds or even cash.

See the wiki on using a Roth IRA as an emergency fund.
Retirement investing is a marathon.

User avatar
Toons
Posts: 12096
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: 401k Match & Emergency Fund, What Next?

Post by Toons » Thu Jan 10, 2013 5:23 pm

I suggest paying down and eventually paying off "$12,000 in student loans at 6.80%",then pick the next goal after that is done :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: 401k Match & Emergency Fund, What Next?

Post by Bfwolf » Thu Jan 10, 2013 9:28 pm

I concur with all the advice above. Given your job is not so secure, half to the emergency fund and half to the student loans, with the emergency fund money going into a Roth in low risk investments.

Once the loan is paid off, come back and we can talk about the house down payment. :happy

EDIT: I actually just had another thought. You indicate you have Roths established already. The contributions (not the earnings) you've made to those Roths are withdrawable without penalty at any time. Hence: your emergency fund may be bigger than you think. If you convert the contribution portion in your Roths to something low risk, that will get you that much closer to achieving your emergency fund and allow you to apply more money to paying down the student loans.

steve02
Posts: 34
Joined: Thu Jan 10, 2013 12:20 pm

Re: 401k Match & Emergency Fund, What Next?

Post by steve02 » Fri Jan 11, 2013 8:06 am

Bfwolf wrote:EDIT: I actually just had another thought. You indicate you have Roths established already. The contributions (not the earnings) you've made to those Roths are withdrawable without penalty at any time. Hence: your emergency fund may be bigger than you think. If you convert the contribution portion in your Roths to something low risk, that will get you that much closer to achieving your emergency fund and allow you to apply more money to paying down the student loans.


We actually don't have Roths established yet, but I like the idea of using Roths as part of our emergency fund. We currently have 3 months in cash, so the next 3 months could go into a Roth. What would be a good fund from Vanguard for this part of our emergency fund? I was thinking about using their target date fund, but that obviously isn't low risk. I do like that the minimum investment in those is $1,000 though.

Also, when a fund has a minimum, does it mean that I can't take out all the principle, just down to the minimum investment? Or can I still get at all the principle?

Grt2bOutdoors
Posts: 17247
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: 401k Match & Emergency Fund, What Next?

Post by Grt2bOutdoors » Fri Jan 11, 2013 8:22 am

jsl11 wrote:My suggestion would be to divide the extra money half and half between the student loan and the emergency fund. When the emergency fund is where you want it, I would put as much as I can towards the student loan. That is a high interest rate in today's economy. By paying that off, you are getting a no-risk return of 6.8%. That is not available anywhere else.
Jeff


Excellent advice.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: 401k Match & Emergency Fund, What Next?

Post by Bfwolf » Fri Jan 11, 2013 12:51 pm

I think you'd be fine with something like Vanguard Total Bond Market Index. It faces meaningful interest rate risk, but I think a decline of more than 20% is unlikely, and that feels acceptable for your emergency fund. If you don't have enough for VBMFX ($3K minimum), there's no reason you can't buy the ETF version BND. If you want even lower risk, consider the Vanguard Short Term Bond Index Fund (VBISX or it's ETF BSV). It has lower expected returns than the Total Bond Market Index fund but is significantly less susceptible to interest rate risk.

I'm honestly not sure what happens if you sell a fund to below the minimum with Vanguard.

User avatar
Pennstateclj1
Posts: 470
Joined: Sun Apr 03, 2011 2:53 pm
Location: San Antone, TX

Re: 401k Match & Emergency Fund, What Next?

Post by Pennstateclj1 » Fri Jan 11, 2013 1:01 pm

scientifics wrote:- $12,000 in student loans at 6.80% (we get a 0.25% deduction on interest for doing direct withdraw). We currently pay about $200/month the minimum payment).


All extra money to this, your e-fund is good for now.

scientifics wrote:- Roth IRA for me (invested in Vanguard target date fund - 0.19% ER)
- Roth IRA for my wife (invested in Vanguard target date fund - 0.19% ER)
- Adding to emergency fund to get it from 3-6 months


These have been merged so ROTH IRA's as your emergency funds for awhile, bond funds are good as others noted. $5,500 each for 2013.

scientifics wrote:- Increasing ING 401k withholdings (all the 401k options have 1.5-2% fees between the expense ratio and the extra fees ING tacks on)


In your case, the 401k isn't as important because your tax bracket is low. Don't contribute beyond the match to these high fees. Just do the 401k to the match (your employer is essentially paying the high expense ratio through the match). Then max the ROTHs or contribute to a house downpayment fund.

scientifics wrote:- Saving for down payment for a house


Depending on how far out this purchase is, you could take some risk if the purchase date is flexible. An intermediate term or limited term bond fund, (tax exempt if you prefer) might be appropriate.

retiredjg
Posts: 30798
Joined: Thu Jan 10, 2008 12:56 pm

Re: 401k Match & Emergency Fund, What Next?

Post by retiredjg » Fri Jan 11, 2013 2:19 pm

scientifics wrote:. We live in PA and our tax bracket is 15% (~13.5% marginal tax rate).

These 2 things are not consistent. Your federal tax bracket is something you need to know. Compare your taxable income (line 43 on Form 1040) with this chart to determine your federal tax bracket.

I think the order of things should look like this:

    -401k up to match to get the free money
    -student loans and emergency fund (split however you are comfortable)

If you wish to use your Roth IRA space to house your emergency fund and only have $1k to start, you could use the Target Retirement Income Fund which is 30% stocks. It's not 100% "approved" to have some of your emergency fund in stocks, but it would be OK to have the second tier of your emergency fund in a little stocks.

You cannot afford to save for a house (1% incoming) while you have the loans (6.8% outgoing), so don't even consider that. Once the loans (and other debt) are gone, you can decide if Roth IRAs or house down-payment is most important for your situation.

Post Reply