ScottFern
Diamond Member
- Oct 23, 2002
- 3,629
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Originally posted by: jaybert
Originally posted by: vi_edit
General opinion is to max out your match on your 401k, then max out your Roth IRA. If you still have money left over, go back and add more to your 401k.
thats not the general consensus at all...general consensus is to max out the 401k up to matching, then max out ROTH IRA, then finish maxing out 401k
Originally posted by: Azurik
Originally posted by: alrocky
"according to some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses"Originally posted by: Azurik
Originally posted by: alrocky
No Emergency Cash
Popular Advice You Shouldn't Take
"According to some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses...
Let's be honest: This is dull, unrealistic and -- I would argue -- not all that sensible. Even if you regularly sock away 10% of your after-tax income, it might take four years or so to amass six months of living expenses...
Sound bad? It gets worse. While you were building up your emergency reserve, you were likely neglecting important goals like funding your 401(k) plan, which might earn you a matching employer contribution, and saving for a house down payment.
My advice: Forget the emergency reserve. Instead, stick at least enough in your 401(k) to get the full company match. Next, fund a Roth individual retirement account. If you still have extra money to save each year, by all means stash it in conservative investments in a regular taxable account.
If you get hit with a financial emergency, tap the money in your regular taxable account first."
I read that a few days ago... that guy... or rather if that is representative of his intelligence, is the dumbest guy to be giving advice for the future.
That's odd. JONATHAN CLEMENTS is pretty well regarded and it's fairly sound advice. There is the opportunity cost involved in saving for emergencies if that is your top financial priority. Insurance and CCs should cover most emergencies - if they can't, the mad money you started to save probably won't save your arse anyway...
Direct quote from Jonathan Clements:
"Those in their 20s are encouraged to invest heavily in stocks, because they have decades until retirement and thus plenty of time to ride out market declines. This is good advice -- in theory...My suggestion: Start with 60% stocks and 40% bonds."
This is probably the worst advice ever. In your early 20's, there is NO advantage is placing 40% of your retirement funds into bonds. You should be pretty be close to 100% in stocks. 80% for the most conservative 20-something year olds. One doesn't have nearly enough in retirement to think about having a stock/bond mixture.
It seems like a lot of the folks in the forum link you posted feel the same way.
If you would've bothered to complete his quote, he offers a financially sound and behaviour explaination for the 60:40 allocation. Novice investors tend to overestimate their ability to withstand market downturns and may sell, turning paper loses into real loses. Thus his suggestion to start 60:40 is fair advice. Your hyperbole assumes the young are bulletproof and ignores this important caveat.In practice, I would be a little cautious. You don't want to invest heavily in stocks and then panic and sell during the next market plunge. Yet that's a real danger if you are new to the market and you have never lived through a market decline.
My suggestion: Start with 60% stocks and 40% bonds. If you find yourself unperturbed by market swings, move your stock allocation up to 85% or 90% after a year or two.
Originally posted by: thomsbrain
Originally posted by: jaybert
Originally posted by: vi_edit
General opinion is to max out your match on your 401k, then max out your Roth IRA. If you still have money left over, go back and add more to your 401k.
thats not the general consensus at all...general consensus is to max out the 401k up to matching, then max out ROTH IRA, then finish maxing out 401k
wow. just wow.
That is the path I follow myself. The old 3-6 month emergency cash rule was quite valid before the days of easy access to money. But now, times have changed but the advice people are stuck giving the adivice they gave 30+ years ago.Originally posted by: alrocky
No Emergency Cash
Popular Advice You Shouldn't Take
"According to some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses...
Sound bad? It gets worse. While you were building up your emergency reserve, you were likely neglecting important goals like funding your 401(k) plan, which might earn you a matching employer contribution, and saving for a house down payment.
If you get hit with a financial emergency, tap the money in your regular taxable account first."
Originally posted by: DLeRium
Originally posted by: thomsbrain
Originally posted by: jaybert
Originally posted by: vi_edit
General opinion is to max out your match on your 401k, then max out your Roth IRA. If you still have money left over, go back and add more to your 401k.
thats not the general consensus at all...general consensus is to max out the 401k up to matching, then max out ROTH IRA, then finish maxing out 401k
wow. just wow.
What the hell is going on with people nowadays?![]()
Originally posted by: dullard
That is the path I follow myself. The old 3-6 month emergency cash rule was quite valid before the days of easy access to money. But now, times have changed but the advice people are stuck giving the adivice they gave 30+ years ago.Originally posted by: alrocky
No Emergency Cash
Popular Advice You Shouldn't Take
"According to some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses...
Sound bad? It gets worse. While you were building up your emergency reserve, you were likely neglecting important goals like funding your 401(k) plan, which might earn you a matching employer contribution, and saving for a house down payment.
If you get hit with a financial emergency, tap the money in your regular taxable account first."
In the worst case scenerio, I can live 3+ years on my credit cards alone without ANY emergency cash. Or, I could use my home equity loan. Or, I could sell some of my many assets. Having a large stockpile of cash making you next to nothing is NOT the path I choose. At the end of every month, I have ~$300 in total (counting my 3 checking accounts and one online savings account). The rest of my money is making a lot more money elsewhere in investments.
Yes, people should have an available source of 6 months of expenses (such as an unused open home equity line of credit). But that source doesn't have to be in cash in a bank earning little to nothing (even online savings at ~5% isn't much).
If times change and money becomes more difficult to get, I'll up my amount of cash.
Yes, if you are going to use a CC for emergencies (which should really be the last resort, not your first line of defense) you should have a spare low APR card that you don't use for anything else. But, if you need cash for the emergency (such as a CC check), you probably won't be getting a good APR on that anyways. I don't think you get inactivity cancellations on CCs, but I could be wrong. If you are worried, use it once a year for something small and pay it off right away.Originally posted by: Special K
Someone just starting out probably isn't going to own a home. Having said that, do you think it would make more sense to have a really low APR card to use in emergencies, rather than a 5% online savings account? I'd like to use a rewards card as my primary CC. Can a CC company cancel your card for inactivity? That is, if I had a rewards card as my primary CC and a really low APR card as my "emergency fund" that I never used except in an emergency, could the issuer of the low APR card cancel my card if I never actually had an emergency and had to use the card?
Also, wouldn't the APR of the emergency credit card need to be less than the historical returns of mutual funds to make it worth it? Otherwise you could end up paying a lot of interest if you ever had an emergency.
Originally posted by: joshsquall
What really bothers me about 401k is not even knowing if I'll live long enough to collect my money. I'm going to be pissed if I die and have boatloads of cash sitting in retirement accounts that I could have used to live a better (short) life.
Originally posted by: dullard
Yes, if you are going to use a CC for emergencies (which should really be the last resort, not your first line of defense) you should have a spare low APR card that you don't use for anything else. But, if you need cash for the emergency (such as a CC check), you probably won't be getting a good APR on that anyways. I don't think you get inactivity cancellations on CCs, but I could be wrong. If you are worried, use it once a year for something small and pay it off right away.Originally posted by: Special K
Someone just starting out probably isn't going to own a home. Having said that, do you think it would make more sense to have a really low APR card to use in emergencies, rather than a 5% online savings account? I'd like to use a rewards card as my primary CC. Can a CC company cancel your card for inactivity? That is, if I had a rewards card as my primary CC and a really low APR card as my "emergency fund" that I never used except in an emergency, could the issuer of the low APR card cancel my card if I never actually had an emergency and had to use the card?
Also, wouldn't the APR of the emergency credit card need to be less than the historical returns of mutual funds to make it worth it? Otherwise you could end up paying a lot of interest if you ever had an emergency.
Lets try some numbers. Lets say you need $2000 a month for your expenses (many can do with far less, but in some areas of the country that barely covers rent). Thus, to have 6 months of expenses socked away, you'd need $12,000. Put that in an online savings account that you keep at $12,000 and 5% interest and you get $50/month. Put it in the stock market at a 10% return and you get $100/month. Thus, you emergency cash is costing you $50/month (and that $50 could have been earning you 10% returns in your investments).
Lets say you do well for 11 years and then have an emergency. In this case, you lost $11,943 by having that $12,000 emergency fund ($50/month compounded monthly at 10% interest). Clearly, if you can make it 11 or more years, you can never lose because your investments would have that $12k you needed as an emergency.
But, what if you only go half that time, say 5 years. By having that emergency fund in a good 5% savings account, you lost $3872 of potential earnings elsewhere. What does $3872 buy you? Well, for starters it buys you 2 months of emergency money. Lets say you use a 20% interest CC for the emergency. After the 1st month, your CC will have $2000 + $33 in interest, $2033 total. After 2 months, $4067 total. After 6 months of using the CC, your balance would be $12,547. Conclusion: If you don't sock money away, you gain an extra $3872 from your investments, but you might have to pay $547 in CC interest if you have an emergency.
As the math turns out, if you use a 20% interest rate CC for your emergencies you need to make it ~10.5 months without an emergency to be ahead. If your emergency is sooner than 10.5 months, you lose more by invensting it instead of having an emergency stockpile. I'll take that risk. If you have a lower APR loan source such as a home equity line of credit, slash that 10.5 months. Or if your investments do better than 10%, slash that 10.5 months.
Worst case scenario: you lose $547 in CC interest. I'll risk $547 to potentially gain $100,000. This $100,000 is how much returns you lost by having $12,000 in a 5% savings account for 29 years.
If you have a CC, use it for the monthly expenses. Even at 20% interest rate for cash advances, you are far ahead.Originally posted by: Special K
Let's say I lose my job. If I use the credit card to survive until I find a new job, where is the money to pay the monthly payments supposed to come from if I'm keeping a minimal balance in my checking account and don't have a savings account? I suppose you could raid the Roth IRA, but what if it's lost money since when you started it?
Originally posted by: Special K
Originally posted by: dullard
Yes, if you are going to use a CC for emergencies (which should really be the last resort, not your first line of defense) you should have a spare low APR card that you don't use for anything else. But, if you need cash for the emergency (such as a CC check), you probably won't be getting a good APR on that anyways. I don't think you get inactivity cancellations on CCs, but I could be wrong. If you are worried, use it once a year for something small and pay it off right away.Originally posted by: Special K
Someone just starting out probably isn't going to own a home. Having said that, do you think it would make more sense to have a really low APR card to use in emergencies, rather than a 5% online savings account? I'd like to use a rewards card as my primary CC. Can a CC company cancel your card for inactivity? That is, if I had a rewards card as my primary CC and a really low APR card as my "emergency fund" that I never used except in an emergency, could the issuer of the low APR card cancel my card if I never actually had an emergency and had to use the card?
Also, wouldn't the APR of the emergency credit card need to be less than the historical returns of mutual funds to make it worth it? Otherwise you could end up paying a lot of interest if you ever had an emergency.
Lets try some numbers. Lets say you need $2000 a month for your expenses (many can do with far less, but in some areas of the country that barely covers rent). Thus, to have 6 months of expenses socked away, you'd need $12,000. Put that in an online savings account that you keep at $12,000 and 5% interest and you get $50/month. Put it in the stock market at a 10% return and you get $100/month. Thus, you emergency cash is costing you $50/month (and that $50 could have been earning you 10% returns in your investments).
Lets say you do well for 11 years and then have an emergency. In this case, you lost $11,943 by having that $12,000 emergency fund ($50/month compounded monthly at 10% interest). Clearly, if you can make it 11 or more years, you can never lose because your investments would have that $12k you needed as an emergency.
But, what if you only go half that time, say 5 years. By having that emergency fund in a good 5% savings account, you lost $3872 of potential earnings elsewhere. What does $3872 buy you? Well, for starters it buys you 2 months of emergency money. Lets say you use a 20% interest CC for the emergency. After the 1st month, your CC will have $2000 + $33 in interest, $2033 total. After 2 months, $4067 total. After 6 months of using the CC, your balance would be $12,547. Conclusion: If you don't sock money away, you gain an extra $3872 from your investments, but you might have to pay $547 in CC interest if you have an emergency.
As the math turns out, if you use a 20% interest rate CC for your emergencies you need to make it ~10.5 months without an emergency to be ahead. If your emergency is sooner than 10.5 months, you lose more by invensting it instead of having an emergency stockpile. I'll take that risk. If you have a lower APR loan source such as a home equity line of credit, slash that 10.5 months. Or if your investments do better than 10%, slash that 10.5 months.
Worst case scenario: you lose $547 in CC interest. I'll risk $547 to potentially gain $100,000. This $100,000 is how much returns you lost by having $12,000 in a 5% savings account for 29 years.
Let's say I lose my job. If I use the credit card to survive until I find a new job, where is the money to pay the monthly payments supposed to come from if I'm keeping a minimal balance in my checking account and don't have a savings account? I suppose you could raid the Roth IRA, but what if it's lost money since when you started it?
Originally posted by: dullard
Yes, if you are going to use a CC for emergencies (which should really be the last resort, not your first line of defense) you should have a spare low APR card that you don't use for anything else. But, if you need cash for the emergency (such as a CC check), you probably won't be getting a good APR on that anyways. I don't think you get inactivity cancellations on CCs, but I could be wrong. If you are worried, use it once a year for something small and pay it off right away.Originally posted by: Special K
Someone just starting out probably isn't going to own a home. Having said that, do you think it would make more sense to have a really low APR card to use in emergencies, rather than a 5% online savings account? I'd like to use a rewards card as my primary CC. Can a CC company cancel your card for inactivity? That is, if I had a rewards card as my primary CC and a really low APR card as my "emergency fund" that I never used except in an emergency, could the issuer of the low APR card cancel my card if I never actually had an emergency and had to use the card?
Also, wouldn't the APR of the emergency credit card need to be less than the historical returns of mutual funds to make it worth it? Otherwise you could end up paying a lot of interest if you ever had an emergency.
Lets try some numbers. Lets say you need $2000 a month for your expenses (many can do with far less, but in some areas of the country that barely covers rent). Thus, to have 6 months of expenses socked away, you'd need $12,000. Put that in an online savings account that you keep at $12,000 and 5% interest and you get $50/month. Put it in the stock market at a 10% return and you get $100/month. Thus, you emergency cash is costing you $50/month (and that $50 could have been earning you 10% returns in your investments).
Lets say you do well for 11 years and then have an emergency. In this case, you lost $11,943 by having that $12,000 emergency fund ($50/month compounded monthly at 10% interest). Clearly, if you can make it 11 or more years, you can never lose because your investments would have that $12k you needed as an emergency.
But, what if you only go half that time, say 5 years. By having that emergency fund in a good 5% savings account, you lost $3872 of potential earnings elsewhere. What does $3872 buy you? Well, for starters it buys you 2 months of emergency money. Lets say you use a 20% interest CC for the emergency. After the 1st month, your CC will have $2000 + $33 in interest, $2033 total. After 2 months, $4067 total. After 6 months of using the CC, your balance would be $12,547. Conclusion: If you don't sock money away, you gain an extra $3872 from your investments, but you might have to pay $547 in CC interest if you have an emergency.
As the math turns out, if you use a 20% interest rate CC for your emergencies you need to make it ~10.5 months without an emergency to be ahead. If your emergency is sooner than 10.5 months, you lose more by invensting it instead of having an emergency stockpile. I'll take that risk. If you have a lower APR loan source such as a home equity line of credit, slash that 10.5 months. Or if your investments do better than 10%, slash that 10.5 months.
Worst case scenario: you lose $547 in CC interest. I'll risk $547 to potentially gain $100,000. This $100,000 is how much returns you lost by having $12,000 in a 5% savings account for 29 years.
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
Originally posted by: shadow9d9
Originally posted by: Special K
Originally posted by: dullard
Yes, if you are going to use a CC for emergencies (which should really be the last resort, not your first line of defense) you should have a spare low APR card that you don't use for anything else. But, if you need cash for the emergency (such as a CC check), you probably won't be getting a good APR on that anyways. I don't think you get inactivity cancellations on CCs, but I could be wrong. If you are worried, use it once a year for something small and pay it off right away.Originally posted by: Special K
Someone just starting out probably isn't going to own a home. Having said that, do you think it would make more sense to have a really low APR card to use in emergencies, rather than a 5% online savings account? I'd like to use a rewards card as my primary CC. Can a CC company cancel your card for inactivity? That is, if I had a rewards card as my primary CC and a really low APR card as my "emergency fund" that I never used except in an emergency, could the issuer of the low APR card cancel my card if I never actually had an emergency and had to use the card?
Also, wouldn't the APR of the emergency credit card need to be less than the historical returns of mutual funds to make it worth it? Otherwise you could end up paying a lot of interest if you ever had an emergency.
Lets try some numbers. Lets say you need $2000 a month for your expenses (many can do with far less, but in some areas of the country that barely covers rent). Thus, to have 6 months of expenses socked away, you'd need $12,000. Put that in an online savings account that you keep at $12,000 and 5% interest and you get $50/month. Put it in the stock market at a 10% return and you get $100/month. Thus, you emergency cash is costing you $50/month (and that $50 could have been earning you 10% returns in your investments).
Lets say you do well for 11 years and then have an emergency. In this case, you lost $11,943 by having that $12,000 emergency fund ($50/month compounded monthly at 10% interest). Clearly, if you can make it 11 or more years, you can never lose because your investments would have that $12k you needed as an emergency.
But, what if you only go half that time, say 5 years. By having that emergency fund in a good 5% savings account, you lost $3872 of potential earnings elsewhere. What does $3872 buy you? Well, for starters it buys you 2 months of emergency money. Lets say you use a 20% interest CC for the emergency. After the 1st month, your CC will have $2000 + $33 in interest, $2033 total. After 2 months, $4067 total. After 6 months of using the CC, your balance would be $12,547. Conclusion: If you don't sock money away, you gain an extra $3872 from your investments, but you might have to pay $547 in CC interest if you have an emergency.
As the math turns out, if you use a 20% interest rate CC for your emergencies you need to make it ~10.5 months without an emergency to be ahead. If your emergency is sooner than 10.5 months, you lose more by invensting it instead of having an emergency stockpile. I'll take that risk. If you have a lower APR loan source such as a home equity line of credit, slash that 10.5 months. Or if your investments do better than 10%, slash that 10.5 months.
Worst case scenario: you lose $547 in CC interest. I'll risk $547 to potentially gain $100,000. This $100,000 is how much returns you lost by having $12,000 in a 5% savings account for 29 years.
Let's say I lose my job. If I use the credit card to survive until I find a new job, where is the money to pay the monthly payments supposed to come from if I'm keeping a minimal balance in my checking account and don't have a savings account? I suppose you could raid the Roth IRA, but what if it's lost money since when you started it?
Can't raid the roth without severe penalties.
Originally posted by: shadow9d9
Can't raid the roth without severe penalties.
Originally posted by: dullard
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
Originally posted by: Special K
Originally posted by: dullard
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
If you don't have a home and you lose your job, how are you supposed to make the payments on the CC, especially if you keep a minimal balance in your checking accounts?
Also what if your Roth IRA has lost a lot of money recently? What if it can't cover the emergency?
Originally posted by: rufruf44
Originally posted by: Special K
Originally posted by: dullard
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
If you don't have a home and you lose your job, how are you supposed to make the payments on the CC, especially if you keep a minimal balance in your checking accounts?
Also what if your Roth IRA has lost a lot of money recently? What if it can't cover the emergency?
That's where you borrow more from other 0% CC and start praying :evil:
Seriously though, that's a lot of IF scenario. Even with drop in the IRA, you should still be able to cover significant portion of the emergency cash.
Originally posted by: Special K
Originally posted by: rufruf44
Originally posted by: Special K
Originally posted by: dullard
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
If you don't have a home and you lose your job, how are you supposed to make the payments on the CC, especially if you keep a minimal balance in your checking accounts?
Also what if your Roth IRA has lost a lot of money recently? What if it can't cover the emergency?
That's where you borrow more from other 0% CC and start praying :evil:
Seriously though, that's a lot of IF scenario. Even with drop in the IRA, you should still be able to cover significant portion of the emergency cash.
But the whole point of the discussion we were having was whether or not it was worth it to have a savings account. If I don't own a home, put all my money into higher risk investments instead of a savings account, and keep a minimal balance in my checking account, where is this cash supposed to come from if I lose my job?
Originally posted by: Special K
Originally posted by: rufruf44
Originally posted by: Special K
Originally posted by: dullard
You can, and that is exactly what I'm arguing to do. Have your emergency fund available, but NOT in cash form. Have $12k in a taxable stock investment account. Have $12k in your house with a HELOC. Etc. Anything that pays more than cash investments.Originally posted by: shadow9d9
Why can't you invest your emergency fund just like your iras? Taxes aren't bad for long term gains.
If you don't have a home and you lose your job, how are you supposed to make the payments on the CC, especially if you keep a minimal balance in your checking accounts?
Also what if your Roth IRA has lost a lot of money recently? What if it can't cover the emergency?
That's where you borrow more from other 0% CC and start praying :evil:
Seriously though, that's a lot of IF scenario. Even with drop in the IRA, you should still be able to cover significant portion of the emergency cash.
But the whole point of the discussion we were having was whether or not it was worth it to have a savings account. If I don't own a home, put all my money into higher risk investments instead of a savings account, and keep a minimal balance in my checking account, where is this cash supposed to come from if I lose my job?
