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Dave Says
Dave Ramsey is America's trusted voice on money and business, and CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 12 million listeners each week on 575 radio stations and multiple digital platforms. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com. |
Dave explains the importance of saving up for an emergency fund first, rather than contributing to a 401(k). Emergency Fund First, Then Investing Dear Dave, Do you think I should stop making contributions to my 401(k) for a year, so I can save up an emergency fund? I'm 28, and debt-free, but I don't have anything saved for emergencies. Bryan Dear Bryan, If you’re debt-free and making decent money at your job, it shouldn’t take a whole year to set aside an emergency fund. Just make it a priority in your monthly budget. And yes, my advice to you is temporarily stop making contributions to your 401(k) until you have a fully-funded emergency fund of three to six months of expenses. I recommend people stop investing, or wait to start investing, until they are debt-free except for their home and have a fully-funded emergency fund in place. In some cases, depending on how much debt they have, it can take two or three years to do all this. I know that seems like a long time, but in the grand scheme of things it’s really not. If you don’t have an emergency fund, but you’re contributing to a 401(k), there’s a good chance you’ll end up cashing out your 401(k) if a large, unexpected expense comes along. Then, when you cash out a 401(k) early, you get hit with a penalty plus your tax rate. That’s not a wise plan! - Dave |
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