Build a buffer or pay off debt proportion?

[ambitions2o]

Hello -

I currently am funding a 401k through my job (with an employer match) and have been maxing out my Roth IRA on the side. In addition I have an EF setup with enough funding for 2 months if anything was to happen.

I also have school loans that I am trying to pay down this year and knock off my list.

So with some freed up income (i.e. tax refund, bonuses, and commissions) do you think my best financial decision is to pay down the debt first or build a buffer.

The debt is around $22k:
$6k @ 6.55%
$10k @ 2.87%
$6k @ 2.1%

The buffer I was building is $2,000

I have a few hundred in the buffer now, but I do like to have a cushion in case I needed it.

Recommendations? I am trying to max out my 401k and my Roth this year to keep my retirement savings up. Actually I contribute almost 28% of my gross pay to retirement. Is that too much?

Thanks.

[ambitions2o]

Any recommendations?

[ua_guy]

I think your EF sounds low. The general recommendation is to have at least 6 months saved up, but that could be reduced depending on your lifestyle, expenses, responsibilities (i.e. if you are still living at home, single, no kids, no car payment, etc). If you have virtually zero expenses, then yes, it might make sense to knock out your loans as soon as possible, but if you're paying your own way through life and are "on your own", then I think a balanced approach is better. Build your EF and maybe throw some of your extra money at the loan that carries the overall greatest impact to your finances.

The goal with retirement savings, at least as conventional wisdom goes, is to contribute as much as you can, as early as you can. 28% is high for a single-earner, especially if you are young, but high isn't bad. It's good, as long as you're meeting your other obligations and goals.

I'm also not sure what you mean by "buffer" - do you mean like a minimum balance in a checking account? I would consider it as part of your EF, or a separately identifiable savings goal.

[autoxer]

I don't think you can save too much, but I would knock out the high interest (6.55%) loan, before going gung-ho on your retirement savings.

[snafu]

I have the impression you have many years to continue to contribute to retirement. Based on the meager facts offered I'd suggest contributing to 401k to access full match, adding to ROTH to represent 15% retirement savings. I presume you know the fee and have chosen a good, no cost, low MER 401k product. I suggest you track it's value 12/31/2012 - 12/31/2013 and quarterly going forward.

It's critical to have $ 1,000. easily accessed cash as a starter Emergency Fund. Depending on your specific circumstances it's important to have funds for basic expenses for at least 3 months should you lose employment or become ill. It's a good idea to keep a cash buffer [not EF] well hidden in your home because in an emergency it can get ugly if ATMs go down or ATMs run out of money.

From that point I'd focus on clearing the 6.55% debt. Would you be comfortable splitting savings between paying off SLs and adding to ROTH where you have control?

[bjl584]

I'd save up at least $1000 before attacking the debt. As others have noted, the high interest loan should go first.

[ambitions2o]

Thanks for the replies.

401K: I am maxing out the matching contribution from my employer already. In addition I save the max ($5k) for my Roth each year. I have always looked at retirement as my main saving priority.

In regards to an EF fund - I do have one already saved up for a few months coverage in a liquid account so I do have a cushion there. I am continuing to grow this account also to reach the 6 month savings I would be comfortable having.

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@snafu: Its not that I wouldn't feel comfortable splitting the between the SL/Savings, however the issue in my mind is that if I contribute full funds I would get more impact than splitting them. I save $430/month for my Roth IRA each month - if I split that to $215 for the Roth and $215 to S/L I just didn't think that was the best use of the funds in my mind (again I am trying to look at new ideas so I am not saying my thought process is right)

When I do focus on the debt (I already make an additional contribution to my S/Ls now) I focus only on the high rate (6.55%) and pay down that one first.