Emergency Fund vs Debt Free

[toboramai]

I have about 8k in student loans left. If I only saved the 15% that goes into my 401k, I could pay off the loans in 9 months but would not be able to put any money into an emergency fund.

The student loans have a 6% interest rate. Should I put more money back towards savings or continue to aggressively pay down my student loans?

[creditcardfree]

I would establish a small emergency fund first before paying extra on the student loan. A good amount to start with is $1000. Once that is established, put all your extra funds to the student loans. After you have paid off that debt you can add more to the emergency fund.

Your 401K should not be considered an emergency fund. It is for retirement only. The amount you are contributing is excellent!!

[MonkeyMama]

I would say, "it depends."

Overall, I agree with ccfree. I think it is good to have a small cushion of cash to avoid further debt. BUT, if you can pay off all your debt within a year - in most cases it is probably the way to go.

Put all those resources to a good emergency fund, once your debt is paid off.

Now, if your job was in limbo, I would just stick with savings, for now. Why I say "it depends."

[fruitbowlk]

I think aggressively pay off your studen loan to get it out of the way. Then you can start to aggressivley save for EF and Retirement.

[disneysteve]

I say do both. Start the EF - $1,000 is fine - and then focus primarily on the loans. Even then, though, you can do a little of both, even if that means repaying the loan will take 10 or 11 or 12 months instead of 9. Yes it will cost you a few extra dollars in interest, but you'll be in a more secure position if anything goes wrong.

[maat55]

I say do both. Start the EF - $1,000 is fine - and then focus primarily on the loans. Even then, though, you can do a little of both, even if that means repaying the loan will take 10 or 11 or 12 months instead of 9. Yes it will cost you a few extra dollars in interest, but you'll be in a more secure position if anything goes wrong.

Be careful Steve, your sounding like DR.

[disneysteve]

Be careful Steve, your sounding like DR.

Very funny.

Seriously, the question so often comes up: Which should I do?
In most cases, the answer is: Do both.

OP says he can repay $8,000 in 9 months. Forgetting interest, that's $888.89/month. I'm sure the minimum payment is a good deal less than that. Let's assume it is $300. That means there is an extra $588/month available. Instead of putting it all toward the loan, pay the minimum for one month. That gives you an EF of $588. Then, pay $488/month toward the loan and $100/month toward the EF. In 10 months, the EF will be at $1,488 and the loan will be gone.

[Radiance]

I've read several posts about this on these forums and it seems that the assumption is always that you have to do one OR the other.
I agree with DR Steve

Those two objectives are not mutually exclusive, both can be fed at the same time and I believe they should.

I would assign let's say 60% of the monies to pay off debt and 40% to the EF until you have at least 1000.
Then 80% to pay off debt and 20% to EF until you have 3 months babebone expenses.
Then 100% towards ellimination of debt.
Once debt is zero, grow EF to 6 months at leat

[cptacek]

Do you get a significant company match? If so, make sure you get that at least.

[maat55]

My caution is to consider your liabilities and your job security.

If you have high liabilities and low job security, I would build the EF higher first. If you have a lower cost of living and stable job, you can establish an 1k EF and payoff debt.

I agree with DR under normal circumstances, but we are in an strange recession. A more conservative plan would be prudent.

[olga1311]

I agree with previous posters that advise to establish a small oh-**** fund and pay off the loan. I would probably also stop 401K contribution for a little while to get out of deb ASAP

[disneysteve]

I would probably also stop 401K contribution for a little while to get out of deb ASAP

If there is a company match, you should absolutely NOT stop contributing. That is an instant and guaranteed 50% return on your money.

If there is no company match, I'd say it depends on the interest rate of your debt and your tax bracket. It most likely would still benefit you to continue the 401k contributions.

[cptacek]

That is an instant and guaranteed 50% return on your money.

Maybe this is the usual case, but not always. I always thought most company matches were at least this generous. My first and second employers matched dollar for dollar up to a 4% contribution. My current employer matches 10%...i.e., if you put in 10% they match it with an extra 1% (though we also have a pension, assuming the company doesn't go bankrupt again).

I don't know if it is worth it to do that if you are trying to get out of debt. That is why I put in my original post "significant company match." I don't know at what point the logic switches for it to be better to not contribute.

[disneysteve]

I don't know at what point the logic switches for it to be better to not contribute.

It would depend on the interest rate of the debt and the tax situation. Unless you are talking about high interest debt, like a 29.9% credit card and a poor 401k match, the 401k is most often the better deal. Remember, not only do you get the company match, but you postpone the taxes on that money. So for a $1,000 contribution, you save about $250 in taxes.

[am_vanquish]

I've seen a few 401(k) plans lately that have a tiered vesting system in the company match (After year 1, you're only 20% vested in matches, year 2 = 40% ... year 5 =100%). Anyone else seen plans like this? It makes perfect sense from an HR standpoint ... tool for retention. I'm just curious how many people have a similar provision in their plan (specifically, how many people do but don't know about it). For me, it's bittersweet to see that my company has given me $x of "free" money, but I only own $x/5 of that right now (even less if you take out the earnings on the 80% of the match that I'm not vested in).