It shouldn’t take a year
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?
Yes, I do. But it shouldn’t take you a year to set aside an emergency fund if you’re debt-free and making decent money at your job. Just make it part of your monthly budget plan, grit your teeth and do it!
I recommend that people put off or stop investing until they are debt-free, except for their home, and have an emergency fund of three to six months of expenses in place. In some cases, depending on how much debt they have, it could take three or four years to do all this. I know it seems like a long time, but it’s really not in the grand scheme of things.
Here’s the way I look at it. If you have no emergency fund, but you’re
contributing to your 401(k), there’s a good chance you’ll end up cashing out your 401(k) if a large, unexpected expense comes along. When you cash out a 401(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 place before they start investing!
I have a question about home warranties. Are they a waste of money if you already have a fully-funded emergency fund, with six months of expenses or more set aside?
In my opinion, they’re a waste of money even if you don’t have that much set aside for emergencies. I recommend an emergency fund of three to six months of expenses to cover the unexpected things that life will throw at you. This amount of cash, sitting in a good money market account with check writing privileges, will give you easy access in the event of a financial emergency. I don’t do extended warranties of any kind, Andy. They’re not a good deal. You’re better off to self-insure against things breaking down, and put what would have been profit and marketing dollars for the extended warranty company in your own pocket!
Dave Ramsey has authored five New York Times best-selling books. The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com