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Attention Finance Wizards!

It’s taken me three and a half years but I’ve managed to pay off my credit card debt! I did this by lowering my pre tax contributions to my 401k (which the company is matching) and putting as much as I could into paying off this debt.

Now that the credit card debt is gone, II’m at a cross roads. I don’t have a safety cushion for if I lose my job, and ideally I’d like 3 months worth of my salary in savings.

My question is: Do I build the nest egg first (3 months worth will take me 5 or 6 months) -or- do I put as much as I can into the 401k and build the nest egg slowly?

8 Thoughts on What comes first, building a nest egg or maxing out my 401k?
  1. Reply
    Bonita Applebaum
    November 17, 2011 at 8:47 am

    Do both simultaneously over a longer period of time and increase your contribution when you have a solid nest egg.

  2. Reply
    lighthearted
    November 17, 2011 at 9:19 am

    Build the nest egg first unless your employer matches your 401k. If they match, say 5%, put that in first then asap build a 3 month+ cash reserve. Congrats on paying off your debt. I assume you own a house. If not, that is your next priority after the 3 mos. cash reserve before the 401k (unless your co. matches–that is free money if they do, a huge priority). For job safety, be sure your resume is posted now on major sites like monster.com and hotjobs.com and collect relevant ads. Always be looking for a better job so you are ready to move asap if needed. Always welcome considering other opportunies. Once you own your home I would recommend investing in rental real estate before putting unmatched money in a 401k as real estate a safer and faster growing asset than mutal funds.

  3. Reply
    black s
    November 17, 2011 at 9:59 am

    LightHeart advise seem good.

  4. Reply
    M C
    November 17, 2011 at 10:25 am

    Build your emergency fund first.. Keep the reduced 401(k) contributions going into your 401(k) (but make sure your at least maxing out the company match)..Remember if you need money and are forced to take it from your 401(k) this can be an expensive propersisition..
    You don’t say how far off your retirement is, but it does sound like a more immediate concern (or potentially closer problem) is
    needing that emergency fund in case you fall on hard times..(ie. your car engine breaks down, or you need to fly to europe for a relatives funeral, or you need dental work… etc..)
    Financial Planning 101: start with an emergency fund, then protect your family (Life Insurance, then retirement (or edcuation) goals that are further along the time frame..

  5. Reply
    Ian
    November 17, 2011 at 10:44 am

    Generally speaking, I would max-out on the 401K since your company has a matching plan and you’ll lower your overall income tax liability since the 401K contributions will lower your taxable income. In addition, the 401K earnings are tax-deferred until you draw the funds from the account (i.e. more money working for you).

    If you are concerned about having a safety cushion for emergencies, the 401K may be able to be both things at once. Check with your employer, but many 401K plans allow you to tap into the funds in the form of a loan. Basically, you are making yourself a loan using the money in the 401K and you pay yourself the interest on the loan.

    One other thing, check with your employer on the vesting rules for your contributions and for the employer matching portion. The vesting rules determine when the money is actually yours. Also, be careful about investing your 401K back into your company’s stock (think Enron and too many eggs in one basket).

  6. Reply
    Steve M
    November 17, 2011 at 11:19 am

    Your 401K is a nest egg. Its your best one until it is paid to the limit especially if your employer matches some of it.

  7. Reply
    Frank Castle
    November 17, 2011 at 12:01 pm

    I suggest you to apply for several Credit Cards until you have ONE YEAR OF SALARY in Credit. (Just don’t charge anything!)

    If you get fired then you can survive for six months with your credit cards. (Charging up to half your salary, of course)

    No matter what, you must never charge more than 50% of your Credit.

    If you have 4 $ 10,000.00 Credit Cards then you can charge only up to $ 20,000.00

    Once you get a new job you use half your salary to pay your debt.

    Keep in mind you need enough savings to pay at least the minimum monthly payments for every Credit Card for at least a year.

    With this method you will need very little money in your savings account and you can easily max out your 401K.

  8. Reply
    Inquisitive125
    November 17, 2011 at 12:19 pm

    You really need to have 6 months or more in your savings just in case you loose your job. 3 months is just not enough! Put this money in an account that bears as high an interest rate as you can get and still be able to access your funds. Money Market accounts seem to be paying quite nicely now and you can still get to your money if you should have an extreme emergency such as job loss. Check the rates at your local Credit Union and make sure that they do not charge you a service fee if your balance should fall below the minimum required amount. You can find a Credit Union (not a bank!) near you at http://www.ncua.gov in the Resources for Consumers section.

    You should begin to put as much as you can in your 401k since this will reduce the amount of taxes you will owe so each quarter (or whatever time period your plan allows) raise your 401k contribution amount as you can afford it even if you have to do it 1% at a time.

    Good Luck and keep saving!

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