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I have heard that 6 months of basic living expenses (about $11,000 usd for me) is a good idea to keep around in case of an emergency. Does this mean that All of my savings every month ($800 every month on top of my 401k) should first accumulate to $11,000 before I start accumulating savings for a house or vehicle? Is it unwise to spend some of my savings on a down payment for house or vehicle before I have completely accumulated my $11,000 rainy day fund?

If this is the case then I would need to save over a year before I could even START saving for a house down payment. This means a house/car could be 3 or so years out. That seems like a long time.

UPDATE (More information): I highly doubt I will find a house for a non-negligible cheaper monthly payment than I am currently paying for my apartment ($698/month). My vehicle is an old truck, bad gas mileage, and not in the greatest mechanical shape, however I live right across the street from my company so I walk to work. I do, however, make occasional 800 mile round trip drives to visit my parents. Saving for a house is not actually high on my personal priority list at the moment.

I do currently have about 20k in unsubsidized federal student loans at 6.55%. I already send 5% (highest employer match %) to my 401k every month. Given all the extra info, would you recommend saving completely towards emergency fund 6 month expenses, sending all or a lot to student debt, or putting some or all of that into a car down payment?

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    Bear in mind that an emergency fund is less important if you are young, resilient, statistically unlikely to get sick/injured/disabled, have hire-able skills, and aren't supporting a family (though still of course a great asset to have). It all depends on your situation. – Steven Dec 17 '13 at 21:57
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On paper the whole 6 months living costs sounds (and is) great, but in real life there are a lot of things that you need to consider. For example, my first car was constantly falling apart and was an SUV that got 16MPG. I have to travel for work (about 300 miles per week) so getting a sedan that averages close to 40MPG saves me more in gas and maintenance than the monthly payment for the new car costs.

When our apartment lease was up, the new monthly rent would have been $1685 per month, we got a 30 year mortgage with a monthly payment of $1372. So buying a house actually let us put aside more each month.

We have just under 3 months of living expenses set aside (1 month in liquid assets, 2 months in a brokerage account) and I worry about it. I wish we had a better buffer, but in our case the house and car made more sense as an early investment compared to just squirreling away all our savings.

Also, do you have any debt? Paying off debt (student loans, credit card debt, etc.) should often take top priority. Have some rainy day funds, of course, but pay down debts, and then create a personal financial plan for what works best in your situation. That would be my suggestion.

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    Careful when buying a house, though; @awestover mentions "we" in his answer, probably meaning he's married/partnered and thus relatively "settled". The wording in the OP implies you're single, which along with your relatively short tenure in the working world means that a house you buy now might not be the right size or location for your future, and in the current market, seller pays closing, putting you on the hook for up to 10% of the home's value in total fees and commissions. With an FHA, you won't have 10% of the home's value in equity until you're 6 or 7 years in to the mortgage. – KeithS Dec 16 '13 at 22:11
  • I added some extra info. Any additional advice? @awestover89 or @KeithS? – Adam Johns Dec 17 '13 at 14:47
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    Are you on the traditional 10 year repayment plan for your student loans or are you on a longer term/income contingent plan? Sounds like house is a low priority, car is a medium/medium low priority so building a safety net is more important than both. I would personally save up all you can towards 3 months living expenses, then slowly wean down and split your savings. Maybe 90% until 3 months of emergency funds, then 70% until 4 months, 40% until you have 5 months set aside, and then 20% until you finish off. Budgeting is a very personal issue, though, and that's just my opinion. – awestover89 Dec 17 '13 at 16:15
  • Yes, I am on the traditional 10 year repayment plan. So you mean 90% into emergency, 10% into loan until I get 3 months emergency. Then 70% emergency and 30% loan until 4 months emergency reached, etc? – Adam Johns Dec 17 '13 at 17:05
  • Not necessarily into loan only, find a good balance. I am a firm believer in enjoying yourself, but not to an extreme, so 90% into emergency, 10% into other, which could be saving for a car, a vacation, paying off loans, or a special treat. 6.55% is a bit on the high side, so paying off sooner would be better, but you need to find your personal balance. I need a vacation each year, just one good trip to unwind and relax, so I make sure to save up 1-2K per year for a vacation, with additional savings being split between brokerage and emergency. %'s were pulled from thin air, not calculated. – awestover89 Dec 17 '13 at 19:30
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I recommend saving for retirement first to leverage compound interest over a long time horizon.

The historical real return on the stock market has been about 7%. Assuming returns stay at 7% in the future (big assumption, but don't have any better numbers to go off of), then $8,000 saved today will be worth $119,795 in 40 years (1.07^40*8000). Having a sizable retirement portfolio will give you peace of mind as you progress through life and make other expenditures.

If you buy assets that pay you money and appreciate, you will be in a better financial position than if you buy assets that require significant cash outflows (i.e. property taxes, interest you pay to the bank, etc.) or assets that ultimately depreciate to zero (a car). As a young person, you are well positioned to pay yourself (not the bank or the car dealership) and leverage compound interest over a long time horizon.

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    I added some additional info. Any additional advice? – Adam Johns Dec 17 '13 at 14:47
  • @AdamJohns - 6.55% is a high interest rate, so you should try to pay off the student loans as soon as possible. It is also important to have a reserve fund and save for retirement. At a high level, here is what you should focus on: 1. work hard and make valuable contributions to the economy so you can command a high wage, 2. save a portion of every paycheck and use the savings to pay yourself (investing in your retirement account, paying off debt, etc). If you focus on paying yourself, you will be debt-free and have a growing retirement/savings account in no time. – Powers Dec 17 '13 at 18:28
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    I'm thinking I will settle with a 3 month emergency fund (already have that much saved) and start sending all the remaining 800 per month towards paying down the student loan – Adam Johns Dec 17 '13 at 20:19
  • @AdamJohns - sounds like a good plan to me. – Powers Dec 17 '13 at 20:31
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Too long for a comment -

It's great that you are saving to the match on the 401(k). Does your company offer a Roth 401(k)? If so, you might consider that, instead. From the numbers you offered, you are likely in the 15% bracket now, but will find you move to 25% in years to come. The 2014 tax rates are out and how the 15% bracket ending at $36,900. (Over $47,000 gross income).

I'd rather see you pay tax at 15% now, and use pre-tax accounts as your income rises. If the Roth is available.

  • Unfortunately my company does not offer a Roth – Adam Johns Dec 17 '13 at 19:12
  • Not a big deal. The match is great. When you bump your savings above that, I'd just use a Roth IRA. – JoeTaxpayer Dec 17 '13 at 19:36
  • Do you think I should try to set up a roth and fully fund it (giving leftovers to extra student loan payments) or focus all extra on paying down student loan debt before I set up a roth? – Adam Johns Dec 18 '13 at 4:06
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    At 6.55%, i'd pay that first, a good guaranteed return on your money by doing that. – JoeTaxpayer Dec 18 '13 at 4:51
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You should plan 1-3 months for an emergency fund. Saving 6 months of expenses is recommended by many, but you have a lot of goals to accomplish, and youth is impatient. Early in your life, you have a lot of building (saving) that you need to do.

You can find a good car for under $5000. It might take some effort, and you might not get quite the car you want, but if you save for 5-6 months you should have a decent car. My son is a college student and bought a sedan earlier this year for about $4000.

Onto the house thing. As you said, at $11,000*2=$22,000 expenses yearly, plus about $10,000 saved, you are making low 30's. Using a common rule of thumb of 25% for housing, you really cannot afford more than about $600-700/month for housing -- you probably want to wait on that first house for awhile.

Down payments really should be about 20%, and depending upon the area of the country, a modest house might be $120,000 or $520,000. Even on a $120,000, the 20% down payment would be $24,000.

As you have student loans ($20,000), you should put together a plan to pay them off, perhaps allocating half your savings amount to paying down the student loans and half to saving?

As you are young, you should have strong salary gains in the first few years, and once you are closer to $40,000/year, you might find the numbers working better for housing.

My worry is that you are spending $22,000 out of about $32,000 for living expenses. That you are saving is great, and you are putting aside a good amount. But, you want to target saving 30-40%, if you can.

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I wish I was in your shoes with the knowledge I have in my head. financial goal setting is a great plan at your age. In my humble opinion you don't want to save for anything... you want to invest as much as you can, create a corporation and have the corporation invest as much as possible. When there is enough monthly cash flow coming from your investments... have the corporation buy you a house, a car, take out an insurance policy on you as key employee... etc.

As for the $11,000 laying around in cash as an emergency fund, no way! With returns as high as 1-3% per month invested properly keep it invested. Getting to your emergency cash reserve you have in a trading account is only a couple key strokes away. As for the 401k... If it is not making at least 25% yearly for the last 10 years (excluding your Contributions) do it yourself in a self directed IRA.

Oh... I forgot to mention When your corporation buys your stuff... if set up correctly you can take them as a loss in the corporate ledger and you know any loss from one entity can offset profits from another, thus reducing any taxes you may have. My friend you are at the point of great beginnings, hard choices and an open door to what ever you want your future to look like. Decide what you want out of your money and don't take "NO YOU CAN'T DO THAT" as an answer. Find someone that will tell you these secrets, they are out there. Good luck.

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    "If it is not making at least 25% yearly for the last 10 years" sorry, -1 That is not a reasonable expectation. – JoeTaxpayer Dec 18 '13 at 17:53

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