Going to Max Savings Before Investing

When I posted about my so-called "raise," I said that I would get back to contributing to my 401k.

And I will, but not yet.

I've decided to put the "raise" (notice the quotations...) toward my six-months living expenses goal first. Once I save six months, I will turn back to investing. I hate to lose investing time (since it really is all about time, especially when you don't earn a fortune, like I don't!) as I am already 31, but I would feel more comfortable with the cash saved. I also tend to do better blasting away one goal at a time.

Saving the six months, though, should only delay me getting back to investing by four months. Hopefully, the market won't do a mad 180 and then explode off the charts in that time. :-)

On that note, I am curious what you veterans have to say about this AND what you newbies are trying to figure out -- especially if you are still in debt.

If you're still in debt, I say you should get your money together this way, in this order:

1. Save $1,000 emergency fund.
2. Focus like a laser on paying off all your debt.
3. Save 3 months of living expenses.
4. Invest, contribute to your 401k, open your own IRA, whatever.
5. Work on saving 6 months of living expenses (I don't think it's necessary for most people to have any more cash than that liquid) with continuing to invest.

Of course, if your employer offers a match on your 401k, then contribute up to the match while you do all of the above. Don't leave that free money on the table.

(Addendum: These are just guidelines based on what worked for me, but all of this depends on your actual financial situation. For some of you, my little 5 steps may not work at all.)

Thoughts?

DH

Comments

[Grace]

I think it depends on one's age. For example, though paying off debt is my highest priority, I am putting roughly one-third of my pre-tax pay into my 401(k). Why? Because I'm 60 years old, and I just started seriously saving for retirement 10 years ago--I'm way behind and I don't have a lot of time to catch those retirement funds up. I can do this because my job is quite stable so I don't worry as much about having three-to-six months living expenses in my emergency fund.

[Billie]

I think this depends...

Personally, I had been putting down 15%of my income in my 401k despite not having any marital savings (have personal savings). Why? My employer matched 50% of everything I put in. Sure makes that attractive doesn't it?

They have temporarily cut off the matching so I have pulled out of the 401k program and am putting that money right into marital savings. I just started that in June and we have a whopping 40% of 1 month saved up. By the time they reinstitute the matching, we will have at least 1 months savings.

[Lara]

I'm a lurker commenting for the first time because I've reached my limit on my options. I'm 33, recently divorced w/a little one, almost $30000 in debt to credit card companies and they all just raised my interest rate to over 20%. I don't know what to do. I've had to defer 100,000 in student loans because I just can't pay them right now. I'm barely breaking even each month now, and once the interest rate increases occur, I'm sunk.
Any advice? I'm trying to put away $1000 at least so I have some liquid savings, but at this point I'm just trying to avoid bankruptcy. The other suggestions seem like pipedreams to me!

[Revanche]

In this climate, it's probably best that you're keeping the cash. I initially suggested 50/50 because I know that I'm super conservative right now w/o a job, and thought that sort of conservatism wasn't really applicable to your situation.

No use trying to time the markets, anyway, right? :)

[Meghann]

I keep changing my mind about this very thing. Currently, I have 6% going into my 401k (used to be putting away 18% - but 6% is where the company will match to). I am putting 50$ per paycheck away for a new(er) car when the time comes. The rest is going toward building up 6 months worth of expenses. Once I have 6 months worth, I think I will direct some money to paying off my student loans early and another portion to opening up a Roth. Not sure if I should just knock out the loans first though. I hate having debt (and the student loans are the only debt so far, but it's a lot!). I'm interested in seeing how you work it out for yourself.

[J. Money]

Oooh I love seeing how people treat their raises and new money so differently! I say you're on the right track because you're following what YOU feel is right. If you need 6 months to sleep better? Amen sister go and get it.

I'm a 2-3 month kinda guy, so anything after that goes right into the market in an attempt to scoop up as much as I can before it (hopefully) gains some traction again. And the 401k is def. the way to go when the time is right for ya - at least that's my thoughts on it all ;) now when we doing happy hour again? I'm getting thirsty...

[kasey at thriftylittleblog]

I think factoring in employer matching is key... even if you contribute $10, you're getting an extra $5 or $20 for the four month period. That is, IF you have matching. No matter what, I'm going to try to take advantage of free money when it is put in front of me!

[DH]

@kasey You're absolutely right, but my company doesn't match. That's why I feel comfortable focusing on the 6 mo goal for right now.

[Tahnia]

This is an excellent blog. Thanks so much for having this.