Dave Says: Save for an Emergency Fund

Dear Dave,

I'm 30 and debt-free. Do you think I should stop making contributions to my 401(k) account for a year in order to save up an emergency fund?

Beth

Dear Beth,

Yes, I do. But it shouldn't take you a year to set aside an emergency fund if you'redebt-free and making decent money at your job. Just make it part of your monthlybudget plan, grit your teeth and do it!

I recommend that people put off or stop investing until they are debt-free, exceptfor their home, and have an emergency fund of three to six months of expenses inplace. In some cases, depending on how much debt they have, it could take three orfour years to do all this. I know it seems like a long time, but it's really not in thegrand scheme of things.

Here's the way I look at it. If you have no emergency fund, but you'recontributing to your 401(k), there's a good chance you'll end up cashing out your401(k) if a large, unexpected expense comes along. When you cash out a401(k) early, you get hit with a penalty plus your tax rate. That's not a good plan!

That's just one of the reasons I tell people to have an emergency fund in placebefore they start investing!

—Dave