Where should I allocate extra money

[mandyms]

Hi all,

Lurker coming out of hiding. I started a new job last month and received a significant pay increase. However, they don't provide short term disability and I'm kind of worried about that being a single parent.

Originally when I started I had increased my 401k contributions to 10% of pay. My employer matches up to 5%. I tried to have a "consultation" with a financial advisor through our EHP; they didn't even ask about my finances, but immediately said I should reduce 401k contributions to just cover the match, save an emergency fund first, then max out ROTH (I just opened one last year, contributing 2500 a year/200 a month), then go back to try to max my 401k.

It sounds like it makes sense to have that 6 month EF in place first (esp w/no short term disability and no one else to really rely on if something happens to me), but my EF is in a ING account, gaining 1.5% interest (and right now I only have 3% of the total EF I calculated). A part of me feels that I would be losing out too much potential gain. Doing some rough calculations, I figured it would take me a little over 2 years to get to the full 6 months of EF if I dropped my contributions to the 401k to 5%.

Other info, I am 30 years old and just started contributing to IRA accounts about 3 years ago. I currently have 16,000 from my previous employers in an account. With my new job, I also get a pension and a total 13% of my salary is being added to that per pay period (not being withheld from my pay).

Thanks in advance for any constructive comments.

[Taxman10]

I would work on boosting the EF right now also. Maybe try for 3 months EF first, then increase your 401k a little, while taking a longer time to build up to 6 mos in the EF.

Retirement savings are great, but if you lose your job and need cash - you need cash ;-)

[thinid]

Definately work on building up your EF. Contributing the extra 5% to your 401K right now isn't going to help you in an emergency. You might want to look around for a higher-yield savings account, I've seen a few that have higher than 1.5%.
Just because you have a 401K doesn't mean that necessarily that's the best place to put your retirement funds. You want to contribute enough to get the full employer match, but beyond that, you may find a better return in an IRA or other investment account. As you're working on saving your EF, do some research on different funds and investments.

[Urban Chicago]

Definitely up your EF. It's supposed to be easily accessible and safe, don't worry about it earning low interest.

[phil5185]

I would limit the EF on the ING to $5000 max. And open a taxable investment account where you can earn 10% to 12%, grow money tax deferred, and have it accessible as a fall-back EF. You could cut your 401k contribution to 5% and put the other 5% into this fund.

[mandyms]

Jan 12, 2011 12:33:52 GMT -5 phil5185 said:

And open a taxable investment account where you can earn 10% to 12%, grow money tax deferred, and have it accessible as a fall-back EF.

Is this an account that is available at a regular bank, or would it be someplace like Fidelity, etc?

[Savoir Faire-Demogague in NJ]

Is this an account that is available at a regular bank, or would it be someplace like Fidelity, etc?


Personally I would not do what Phil suggests. His 10-12% is 20 to 30 year returns in the S&P 500 Index.
You need to have liquid assets for short term needs.
You are protecting against short term financial interruptions.
You can look into short term disability insurance. I have no clue what this would cost, but that is an alternative.

[SVT]

Jan 12, 2011 13:20:58 GMT -5 mandyms said:

Jan 12, 2011 12:33:52 GMT -5 phil5185 said:

And open a taxable investment account where you can earn 10% to 12%, grow money tax deferred, and have it accessible as a fall-back EF.

Is this an account that is available at a regular bank, or would it be someplace like Fidelity, etc?

You can open brokerage accounts (taxable account) at a lot of banks but the general consensus is to leave your banking to banks and your investments with investment companies. Fidelity is one, Vanguard is another. Both are good.

Anyway, to your OP, I think you should maybe have a few thousand in a liquid savings account and max the Roth. If something happens you need more money than the leftover income you have and the amount in the liquid savings account, you could withdraw contributions from the Roth tax and penalty free. That way, you have the best of both worlds. You're not missing out on the Roth contributions but if something happens that you need the money, you can take some out of the Roth.

[Tiny]

Are you putting 15% of Gross dollars earned into retirement savings WITH your company match? If you are doing more than that (I suspect you are) dropping your 401(k) contribution won't derail your retirement.
How are you calculating your "EF" needs? Based on 6 months of income? or 6 months of fixed expenses? Or some other combination? Not that that really matters all that much...

Without more info and trying to answer your question, I'd figure out the % of gross I was saving for Retirement - if it was more than 15% I'd cut it back (via the 401(k) not the Roth) to 15% and use the cutback money to pad the EF. Once the EF got to 3 months, I'd reconsider my options.

You can open an account at Fidelity/Vangaurd/etc... they usually have something like a checking account with interest - cash reserves or money market that gets slightly better interest than your local bank.. I'd start with the EF in something like that - if you need 1K you can write a check or transfer the money. I'd keep 5K in that account and as it got bigger I'd skim off money to a more risky fund kinda like Phil Recommends. Odds are you won't have an emergency where you need more than 5K all at once right now.

I'm gonna plug the Smart Spending board here: you may be able to find lots of easy usually painless ways to squeeze $50 or $100 out of your monthly budget with the tips and tricks and suggested changes everyone talks about over on Smart Spending. Just saying sometimes doing little things can add up and help you build your EF faster.

[mandyms]

ATSiaRU, thanks for putting it in that perspective. I totalled it up; if I dropped down to just cover the match and combined that with the company match, plus pension, plus the amount I am currently contributing to my ROTH; the total contribution to retirement is 26% of my yearly gross. I never really sat down to consider how much I need to save for retirement, esp with me starting to save later in life. Just always thought I needed to hurry up and save as much as possible. BTW, is there an actual way to figure this number; I have played with some of the calculators, but they all give me different numbers.

The six month calculation is dependent on my current budget, which I think is at it's bare bones right now (I could get rid of my internet, but that would only save $25). I included daycare expenses b/c I figured if I were in the hospital or injured, I would still need to take her there on a regular basis. With the new job and increase in pay, I just started giving myself a $50 allowance for clothes, entertainment and misc (which would cover for myself and daughter). I am still working with the grocery hounds on the WIR board to try to decrease my grocery budget which has come down $100 a month over the past year.

[Urban Chicago]

When calculating your emergency fund, don't forget that you might have to pay COBRA in the event of a job loss.

[Peace77]

I agree with your advisor's suggestion to reduce your 401(k) contribution to 5% (match level).

Reduce your retirement funding to around 15% for now. Remember that you don't have to save all of it. Some of your retirement funds will come from interest and dividends.

1. Add to your EF to 6 months of living expenses. Keep your EF in a high yield savings or money market account so it is risk free and liquid. You can compare rates at www.Bankrate.com

2. Pay off debt (except mortgage).

3. Take care of any deferred expenses. That is, take care of anything that you put off for lack of funds such as car maintenance, dental check ups, etc.

4. Buy short term disability insurance.

5. Add to your EF until you have 9 months worth of living expenses. This is the amount recommended by Suze Orman. (Due to the economy, people need more than a few months to find new jobs.) Also, would keep your EF higher than 6 months as you are a single parent.

6. Set up additional savings categories for future needs such as medical/dental expenses, Christmas / Birthday gifts, eventual appliance, furniture and car replacement.

7. Max out your Roth IRA

8. Pay off mortgage or save for downpayment on a home.