Author Topic: Savings and Investment Priorities  (Read 1630 times)

knoxnate79

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Savings and Investment Priorities
« on: February 04, 2016, 07:48:18 AM »
I've paid off all my high interest debt. My remaining debt is a 0% interest car loan, which unfortunately is still $600/month, and a student loan that will be forgiven in approximately 7 years thanks to the Public Service Loan Forgiveness program (I will have paid about $75,000 for a $98,000 student loan). I don't see the point of paying those loans off early. I have no emergency savings, as I focused every last penny on paying of my high interest debt, which I've finally accomplished.

I know some folks like to have 1-12 months of cash (or another relatively liquid asset) for expenses if one lost his job. I don't want to have a lot of cash. I use Betterment for my investments outside of my retirement accounts through work. Betterment's "Safety Net" at the recommended 40% stocks, 60% bonds looks like an attractive place for the majority of my liquid emergency funds.

My work retirement accounts are a 401(a) through TIAA-CREF, that my employers funds exclusively (I can't add to the contribution) at a rate equal to 10% of my gross salary. My employer matches up to $50/month in my 401(k), which I match. I have a 457(b) as well.

Should I meet the $50 dollar match, then contribute no more to my retirement accounts until I have the desired amount saved in my emergency funds? Or should I spread out my money across all of these "buckets" and just take more time to reach my emergency savings goal?

My job is relatively secure. I have tenure. But I hate it. Since I don't know what I would enjoy doing, I plan to stay with this job, because it has great benefits, until I'm FI and/or figure out a way to make a living doing something that's more enjoyable.

I think I'd be comfortable with 3-6 months of expenses saved as my emergency fund, but I really want to put the accelerator down on my FI date ASAP. If anyone would care to share how they approached striking this balance, I'd be interested to learn.

Thanks.

zolotiyeruki

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Re: Savings and Investment Priorities
« Reply #1 on: February 04, 2016, 08:04:41 AM »
One common approach around here is to use credit cards as your source of an Emergency Fund.  That way you don't have to park your own money (and give up the potential returns).  Another option is to contribute to a Roth IRA, and if an emergency arises, withdraw your contributions (with no penalty) and use that for your EF.

bearkat

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Re: Savings and Investment Priorities
« Reply #2 on: February 04, 2016, 08:05:54 AM »
It's a little hard to give advice without knowing how much you earn, save,  or spend each month, but here is what we did:

(Aside, that $50/month is jokingly low, but it looks like they more than make up for it with the 401a contributions.)

We save 50% of our after tax income and have dual incomes, so we felt no need to have an "emergency" fund beyond the amount of the annual max out of pocket for our HDHP. That amount is $9k, so we have $9k in an online savings account and we put everything else in the market. We feel secure enough that if something comes up (non-medical tradegy) we can cover with our cash flow that month and just save less.

I'm sure there are people who would want a 12-month EF even if they saved 80% of their income per month, so YMMV.

AlwaysLearningToSave

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Re: Savings and Investment Priorities
« Reply #3 on: February 04, 2016, 08:46:33 AM »
My job is relatively secure. I have tenure.
. . .
I think I'd be comfortable with 3-6 months of expenses saved as my emergency fund . . . .

I think these are the two most important things.  In my mind, the biggest risks to hedge against with an emergency fund are loss of income and medical expenses.  Worst case scenario, both happen at the same time.  A third risk is the risk of a large unexpected (or expected but impossible to time) expense, like needing to buy a car, furnace, major appliance, etc. 

If you have tenure and don't hate your job so much that you might do something stupid, then job loss risk is relatively low and you don't need as big an emergency fund.  If your job has great benefits, your out of pocket medical costs are likely not going to be that great.  If you have a high savings rate, you can always use your current income and credit cards to cover unexpected expenses. 

In the event you have a medical emergency that is accompanied by inability to work (and therefore lost income), the game changes completely and all of your savings are on the table.  Review your potential social security disability income benefits and any long-term disability insurance policies to account for this risk. 

Considering all this, you seem to be a good candidate to keep a relatively small amount of cash on hand so long as you also have a "second tier" of relatively easily accessible investments such as the Betterment "Safety Net" available to draw on if you run into huge expenses. 

If I were you, I would save three months of expenses as an emergency fund in cash***, and then build the second tier of emergency savings in an after-tax investment account.  Once I reached a comfortable number in the second tier, I would max the tax-advantaged accounts. 

*** Based on the comment about tenure, I'm assuming you are a teacher at some academic level, earning a good-but-not-great salary.  The more frugal your expenses, the bigger the emergency fund may need to be in relation to your average monthly expenses to be sufficient to cover potential large expenses.