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Saving The Bare Minimum: Emergency Funds and 401Ks
Posted By Jim On 12/18/2006 @ 9:00 am In Investing,Personal Finance,Retirement | 3 Comments
I was reading a recent answer by Walter Updegrave to a reader question about how much a new college graduate should save in order to “get a healthy start” on their financial life. The answer was a bit of a cop-out as he basically says “it depends on your situation,” but I think there exists a bare minimum of what you should be saving from month to month and it should be a standard for everyone who has gainful employment. The absolute bare minimum consists of two things: 401(k), if your employer offers a match, and an emergency fund of at least three months of your expenses.
I had a friend back at my old job that didn’t contribute to his 401K, even though we were given a 3% match on a 6% contribution, because he had student loan debt and wanted to pay that off first. He also didn’t truly appreciate how he would be getting a 3% match by his employer and so it wasn’t until a year or two into the job that he actually started starting contributing (if you ask him though, he’ll say he’s been contributing since the beginning). If your company is offering you free money in order for you to save towards your own retirement, you have to take it… it’s silly not to. Also, the match usually is capped at something in the low single digits, so you’re only talking about giving up a small amount of your earnings (especially after taxes).
This is usually a source of discussion and argument: how many months worth of expenses should be in your emergency fund? Whether you believe it’s three, six, or twelve months, it’s critically important for you to fund this account as soon as possible because this will help you smooth out the unexpected financial burdens when they appear. The reason you have an emergency fund is so that when your car does break down or you are unexpectedly fired from your job, you have a few months saved up so you can weather the storm. For those months you don’t need to tap into your retirement accounts or start selling your assets, you can deal with the situation knowing you have a little bit of breathing room. How much breathing room you will need depends on your own comfort level, some people can operate knowing they only have three months in their safety net – others require a full year. Either way, funding this as quickly as possible is crucial.
After these two, I feel what you’re able to do depends on your situation, as Updegrave says, but I feel that everyone should include both the 401K and the emergency fund in their financial plans. After that, depending on how much you’re able to put away, you can start considering Roth IRAs and larger contributions to your 401K.
Source: CNN Money 
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 CNN Money: http://money.cnn.com/2006/12/14/pf/expert/expert.moneymag/index.htm?postversion=2006121416
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