Dave Says: 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