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I'm 23 and have started my first full-time job approximately 7 months ago. Please bare with me, I'm a novice to financial investments.

I just became eligible to contribute to my company's 401K plan which I will start contributing to this week ($0). I've been saving small amounts away each paycheck to an emergency fund for a couple of months ($2K). I also have a growth fund that was started by my godfather when I was a child, which I have never touched ($3K).

My only current goal is to reach $5K, then $10K, in my emergency savings to cover any sudden surprise high expense (medical deductible, car accident deductible, expensive car repair, legal fees, etc.). I am going to contribute ~$100 per bi-weekly paycheck into my aggressive Roth 401K, and I'm doing the the same for my emergency savings fund.

The only thing I owe money towards are my student loans. $5.6K @ 3.86%, $4.7K @ 4.66%, and $21.5K @5.84%.

I see four courses of action with my growth fund:

  • Leave the $3K in the growth fund
  • Cash it out and use it to pay some of my high-interest grad loan off (drop from $21.5K to $18.5K)
  • Cash it out and place it into my emergency savings account ($2K -> $5K). Start contributing less to my emergency savings, and more to my Roth 401K.
  • Cash it out and put it into my Roth 401K.

What things should I not do with my growth fund? I think there is more than one viable option, but I'm more interested in knowing what would be a bad move and why.

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    You can't put outside money into a 401(k); contributions to 401(k) accounts must come from salary deductions (or employer contributions). Of course, money is fungible, and you can temporarily increase your 401(k) contributions (which will reduce your take-home pay) and fill the hole in your budget by living off the proceeds of the growth fund cash-out, and thus effectively put that $3K into your 401(k) plan. – Dilip Sarwate Apr 16 '17 at 16:48
  • Okay, thanks, good to know. I thought since it was a Roth 401 K, you could make post-tax contributions, so long as you were under the annual federal limit. – Lil' Bits Apr 16 '17 at 21:58
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  • One question - Does the 401(k) offer any matching? What are the match terms? – JoeTaxpayer Apr 17 '17 at 11:57
  • @JoeTaxpayer My employer does not match, but they do a percentage-of-salary contribution at the end of the year regardless of participation in the plan. – Lil' Bits Apr 17 '17 at 18:29
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First, read my answer here:

Oversimplify it for me: the correct order of investing

For me, the answer to your question comes down to how badly you want to get rid of your student loan debt. I recommend that you get rid of it as fast as possible, and that you sacrifice a little in your budget temporarily to make that happen.

If that is what you want, here is what I would do. Following the steps in my other answer, I would pay off the student loans first. Cash out your non-retirement growth fund to jump start that, then challenge yourself to take as much of your paycheck as you can and throw it at the debt. Figure out how many months it will take before the debt is gone.

Once the debt is gone, you won't have those monthly payments anymore and you won't be continually losing money in interest to the bank. At that point, you can build up your cash savings, invest in your employer's 401(k) plan for retirement, and start saving toward other long-term saving goals (car, house, etc.)

To address some of your other concerns:

  • If you cash out the non-retirement fund, you'll probably owe some capital gains tax. (Although, on a $3k investment, the long term rate won't add up to very much, depending on your tax bracket and cost basis.)

  • You can't use the money from your non-retirement fund to invest in your 401(k). You can only contribute to your 401(k) via payroll deduction.

To explicitly answer your question, your non-retirement fund is not bound by the limitations of retirement funds, meaning that you can cash it out and use it however you like without penalty, only paying perhaps a few hundred dollars of capital gains tax at tax time next year. Think of it as another source of cash for you.

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    The linked Q&A is a great one, it's a go-to for many new question here. For questions like this, I'm still focused on the matched 401(k). After depositing to the match, the rest really depends on OP's goals. – JoeTaxpayer Apr 17 '17 at 12:00
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I like the way you framed this question. There is no single right answer for what to do with your savings, but there are some choices that are wrong in the sense that they are dominated by other choices you could make. Of the choices you listed, there are two that fall into that category. The ones that seem like a bad idea to me are:

Putting it into your Roth 401(k). You can't do this directly anyhow, but you could do it indirectly by increasing your contributions and using the growth fund to cover the hole in your budget, but that's a lot of work for a relatively small gain. You would essentially be exchanging one long-term investment for another long-term investment. You would pay capital gains taxes on the investment when you sell it today, in order to not pay taxes on its earnings when you eventually withdraw it. There is some benefit there, but it's a long way off, not that large, and probably not worth the effort. Things that might change your mind: If your 401(k) was a traditional 401(k) (paying tax at capital gains rate today to get a deduction at your normal income rate is likely to be a win). You're not contributing enough to get the full company match (always try to get that match if you can).

Putting it into your emergency fund. Once again, you are likely to pay capital gains tax if you do this, and you will be putting it into an investment that is likely to get a lower return than your current one. It isn't really necessary to incur these costs, since if you encounter an emergency that you can't cover with your existing emergency fund, you could always liquidate the growth fund then, when you know you need it. Now, a growth fund is going to be more volatile than what you would normally want for an emergency fund, but the risk isn't that bad, if you think about it. Say your emergency comes up and you find that the growth fund is down 20% (which would be a pretty horrible run). That's $600 less that you have to deal with the situation. Keep in mind that you already have $2000 (and building) in your current emergency fund. Is that $600 going to make the difference between meeting the need and not? It's not likely. Better to leave the investment where it is and keep building your emergency fund week by week. Things that might change your mind: Your level of risk aversion (if having that money in a more risky investment is keeping you up at night, move it). You face significant job uncertainty (if you have reason to think your job is at risk, it might be a good idea to top off that emergency fund sooner rather than later.)

Your other two choices both seem like solid options under the right circumstances. If it were me, I'd leave the investment in place rather than use it to pay off the student loan. The investment is likely (though of course not guaranteed) to earn more than the interest rate even on the highest-rate loan, especially when you consider that the interest on the student loan is probably tax deductible. Moreover, the size of the investment isn't enough to fully repay the loan, so putting it toward the loan won't even improve your cash flow for some time to come. However, there is always a chance that the investment will perform poorly and some people prefer the guaranteed return from paying off the loan. It depends on your personal risk tolerance. The one thing I would recommend is to think of putting the money toward the loan not as a debt repayment, but as a fixed-income investment with a yield equal to your loan's interest rate. If you would still consider buying it then, then go ahead. If not, then stick with what you've got. In my experience people get way too emotional about debt; try to take that emotion out of your decision making if you can.

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