Not sure where to go from here - Roth & 401k/Paying debt, etc??

[emnah94]

I'm 29 years old, make $60k per year (soon to get a raise), live in a high cost of living area, and currently rent an apartment. Over the past few years, I dug myself out of > $10k cc debt and currently have it down to $4000 at 0% (currently paying $160/mo on it). The only other debt I have is $11k in student loans at 5%. My credit score is in the high 700s.

I have begun saving in an ING emergency fund at $600/month and its currently at $4100. I also have separate accounts for Vacations ($100/mo), Misc purchase ($75/mo), and Christmas ($65/mo).

I also contribute to a ROTH, at $250/mo for a total of $3000 for this year. Its my first year contributing to it - I know, sad. I also have about $2400 in a Rollover IRA that I accumulated from a former employer.

My question is - should I also be contributing to my company's 401k? I know it sounds like a stupid question b/c saving money is always the way to go, but my company doesn't match any of my contributions and I've always heard I should contribute only up to what they will match. Although they don't match, they do drop in 10% of my yearly income into a fund on an annual basis (have yet to see it since I'll be reaching 1 year in a few months) regardless of if I contribute to the 401k.

Also, should I at some point convert my $2400 rollover amount into a ROTH?

I am freaking out a bit because I spent most of my 20s being stupid w/ my money and am now trying to play catch up. I have goals of buying a house in the next few years and would like to get a new (used) car eventually. But, I want to be financially sound before doing so.

What's the best course of action? I can afford to max out my ROTH contribution, but then what? Should I contribute to my 401k? Should I put more into my emergency savings? Or should I get that cc debt down even if its at 0%? Since the cc debt is at 0%, I was thinking of paying what I could now and transferring again next March when the promotional APR expires...

Help?

[creditcardfree]

I think your emergency fund is a good place to start. Do you have a goal amount in mind? It is often suggested 3-6 months of expenses. Looks like you could have 10K in about 10 months.

After the EF is funded, I would save at least 10% towards retirement, which is $6000. So first max out a ROTH, next year that will be 5K. The remaining amount could be invested into your 401k.

I'm not big on debt, so I personally would probably attack the debt before doing the two I mentioned above...but other's may disagree. But I would want those two debts off my back before adding more regardless of whether it is in the form of a house or car.

It's great you are thinking about what you want. And YES, eventually you should convert the rollover to a ROTH. It is not that big of an amount to pay taxes on for your income. You could even split it over two tax years, to soften any blow you might be concerned about.

[Ima saver]

I agree with creditcard free. You need to build up your emergency fund and fully fund your roth ira each year. I also would get rid of that credit card debt before next March.

[emnah94]

So is it wise to take money from my emergency fund and pay off my cc debt and then build up my emergency fund from there (while maxing my ROTH contribution)? Or continue on my path and throw everything extra toward the $4k?

[greedy4chips]

So is it wise to take money from my emergency fund and pay off my cc debt and then build up my emergency fund from there (while maxing my ROTH contribution)? Or continue on my path and throw everything extra toward the $4k?

That would leave you with virtually no EF. Perhaps you could shift some of the money from your future additions to your EF to pay down the CC faster. I know the 0% debt is hard to pay off due to it not costing you interest that is why I think that making a full blown effort to eliminate that debt is not necessary. $400 payment per month gets it paid off in 10 months (before its % due to go up), while still allowing you to put $360 towards your EF.

[jIM_Ohio]

So is it wise to take money from my emergency fund and pay off my cc debt and then build up my emergency fund from there (while maxing my ROTH contribution)? Or continue on my path and throw everything extra toward the $4k?

short answer YES. You have $600/mo which you have budgeted, plus the cc payment of $160 plus EF of $4100. This pays off cc in one month, then send $760 to EF and it is at one months expenses in around 3 months and you have less risk (less cc debt).

Back to original question:

If you can put 10% of your income into a Roth, that's a good way to go (because you have no match). You make 60k, so 5k into a Roth is around 8%. I would then look to put around 2% into 401k. This assumes the 401k choices are effective.

If the 401k choices are NOT effective, I would look to put 2% of post tax income into a mutual fund which is highly tax efficient- I suggest a total market index.

I'd suggest 2 months expenses in an EF, plus another 1-3 months expenses which are invested conservatively (but possibly less liquid). Assuming the 1-3 months extra is getting a slightly higher return than the EF. If the EF is high yield money market, the 4 months expenses there is a good move.

[autoxer]

So is it wise to take money from my emergency fund and pay off my cc debt and then build up my emergency fund from there (while maxing my ROTH contribution)? Or continue on my path and throw everything extra toward the $4k?

I would use the emergency fund money to pay down the CC when the 0% promotional rate expires. I never felt the need for much of an emergency fund when I was in debt, but that is a more personal decision, based on having no house, no dependants & two reliable cars.

My question is - should I also be contributing to my company's 401k? I know it sounds like a stupid question b/c saving money is always the way to go, but my company doesn't match any of my contributions and I've always heard I should contribute only up to what they will match.

Just because the 401k doesn't match anything, doesn't mean it's not a good deal. You still get a tax break on the money that you put into it. So if you decide to put 2% in, ($100/month) then your take home pay will only decrease by ~$80. Get some more details about the 401k plan that they offer, like what brokerage runs it & what the investment choices are. Just get it started small & you won't even notice the $20/week. Then later when your CC debt is completely gone, you can increase the contribution.

[Vapors]

There is no need to use your emergency fund to pay off the CC debt before March. Keep paying the CC down and if you have not paid it off by March, then consider using your emergency funds to pay off the remaining balance. For now, keep you emergency fund in a nice interest bearing account.

Max out your Roth and put more in your emergengy fund. You want to have at least 3 months of expenses in your emergency fund in case you lose your job.

Any thing left over, put in your 401k.

As for converting your Roth, you will come out ahead in the long run if you do it, but you don't have to. You will have to pay tax on it now or in 35 years.

[autoxer]

I noticed that you asked similar questions back in January, 2007:

http://www.savingadvice.com/forums/personal-finance/25573-emergency-fund-paying-cc-roth-etc-help.html

and February, 2006:

http://www.savingadvice.com/forums/personal-finance/14782-ira-long-term-savings-vs-paying-all-cc-debt.html

It looks like your emergency fund is much more healthy, but your CC debt has lingered. One thing that helped me was to cut them up, so I couldn't add to them while I was paying them down. Then I got the cards replaced when I had regained control, and I haven't paid any interest since then.

Another good habit that I have started is to recalculate my Net Worth each month. Seeing the progress is motivating.

Also in the older post, you say that you are contributing 2% to a 401k. Was that stopped?

[jIM_Ohio]

I noticed that you asked similar questions back in January, 2007:

http://www.savingadvice.com/forums/personal-finance/25573-emergency-fund-paying-cc-roth-etc-help.html

and February, 2006:

http://www.savingadvice.com/forums/personal-finance/14782-ira-long-term-savings-vs-paying-all-cc-debt.html

It looks like your emergency fund is much more healthy, but your CC debt has lingered. One thing that helped me was to cut them up, so I couldn't add to them while I was paying them down. Then I got the cards replaced when I had regained control, and I haven't paid any interest since then.

Another good habit that I have started is to recalculate my Net Worth each month. Seeing the progress is motivating.

Also in the older post, you say that you are contributing 2% to a 401k. Was that stopped?

It should be noted the 4k in cc debt is higher now than when poster posted in January.

This is where the EF issue bothers me... having 4k in debt yet suggesting someone have 10k cash lieing around makes little sense, or even working towards the 10k cash goal prior to being debt free makes little sense.

I have been debt free for some time... but do not have a fully funded EF yet (working on that now). I have had savings before and the feeling was not that good... but being debt free is a great feeling.

This is me, others are different... but suggesting EF before a moderate amount of debt is paid off makes little sense to me. Get debt paid off, then move on (and stay out of debt going forward). Creating the habit of being debt free is a much better financial planning direction than having 10k in cash sitting around earning low rates of return.

[anonymous_saver]

(1) I would think about stoping contributions to your vacation, misc., and x-mas fund at least until your credit card debt is paid off. By the way, when will the 0% be gone, and what will the rate be? Think about creating another sub-account with your high interest bank (I'm assuming you have one), label it "credit card". Start putting in extra money into this fund every month and then a week or so before interest starts being charged on the card use this chunk of money to pay off some of this credit card debt. By the way if you took the $240 a month you are saving for acations, misc., and x-mas, then in 12 months you would have $2,880 towards the credit card. I would also think about taking some of your emergency fund to pay off the credit cards as soon as they start charging you interest. Keep at least 1-2 months worth though.

(2) I would fund your Roth IRA to the max (even if this meant lowering your emergency fund down to $500 a month). In addition, I would start off with something small in your 401(k). Then once you have your credit card debt paid off, I would maybe increase it by a few percentage points. Maybe you could just increase it by 1% every 6 months or something (just an idea).

(3) I would rollover that IRA to a Roth. With it "only" being $2,400 it shouldn't make a huge difference in your taxes. Just be aware that you may have to pay a bit more into your taxes next year (or you could use the IRS's W-4 witholding calculator to give you a good idea of what you would need to do with the # of allowances you take).
IRS Withholding Calculator

(4) Do you have a goal of saving for a down payment as well? If you do, I would seriously consider adding another savings account for that as well. I would also lower the amount of savings towards your "extras" (vacations, x-mas, etc.) if this is one of your goals. Since a down payment is hard to save up, if I were you I would possibly re-prioritize your goals a bit (I don't think your goals are bad! I'm just trying to bring up another topic that may be of interest to you.

It sounds like you are doing good though! Be proud of yourself. Just because some us have different opinions, doesn't mean you are not doing good.

[Vapors]

This is where the EF issue bothers me... having 4k in debt yet suggesting someone have 10k cash lieing around makes little sense, or even working towards the 10k cash goal prior to being debt free makes little sense.

I agree with you Jim. I only said to put off repaying the CC debt so long as the rate was 0% (next March). It also depends on your circumstances. I single guy will need a lot less of an emergency fund then a guy with a stay at home wife with 2 kids.

[emnah94]

Thanks for all of your replies! After reading a few of the posts, I've updated my ROTH contributions to fully fund it for 2007.

In regard to the debt, yes, it's gone up in the past year b/c about 10 months ago I relocated (to my higher cost-of-living area, no less) and tacked on a few hundred as a result. I guess I could've used my emergency fund for some of the expenses, but I really wanted to keep the mentality of the fund being there for emergencies only.

As for the 401k contributions, before relocating and changing employers, I was contributing about 2-4% of my income to a 401k - because my employer at the time was matching. Once I switched to my new company and noticed they didn't match, I was unsure about what to do.

I understand the point regarding saving vs. having debt - why save when I have debt? I guess this is where I'm most unsure - b/c I would like to be cc debt free (what a nice feeling it must be!!), however, I'd feel so bad seeing my EF whittled down to $100 as a result. Although, I could then throw the $835 (including my misc. account money of $75/mo) towards my EF and build the amount back up in 5 months? Perhaps I can come up w/ a nice compromise so that I feel like I'm paying down the debt yet still have some sort of cushion in my EF - perhaps using only 50% of it? That'll bring my cc debt down to $2k and leave $2k in my EF. Ultimately, I am shooting to have my EF at $10k for 6 months living expenses...

I definitely need to start saving for a down payment, however, I feel like any extra money I have should be going toward my debt or EF right now (aside from vacations -meaning my trips to visit home- and Christmas expense -an unnecessary, but necessary account to avoid overspending at that time). I can't wait until my cc is paid off, I have my EF built up, and can put more $ toward my student loan, contribute to my 401k, and start saving for a house.

BUT, I feel good that I'm at least maxing out my ROTH for now....

[jIM_Ohio]

Thanks for all of your replies! After reading a few of the posts, I've updated my ROTH contributions to fully fund it for 2007.

In regard to the debt, yes, it's gone up in the past year b/c about 10 months ago I relocated (to my higher cost-of-living area, no less) and tacked on a few hundred as a result. I guess I could've used my emergency fund for some of the expenses, but I really wanted to keep the mentality of the fund being there for emergencies only.

As for the 401k contributions, before relocating and changing employers, I was contributing about 2-4% of my income to a 401k - because my employer at the time was matching. Once I switched to my new company and noticed they didn't match, I was unsure about what to do.

I understand the point regarding saving vs. having debt - why save when I have debt? I guess this is where I'm most unsure - b/c I would like to be cc debt free (what a nice feeling it must be!!), however, I'd feel so bad seeing my EF whittled down to $100 as a result. Although, I could then throw the $835 (including my misc. account money of $75/mo) towards my EF and build the amount back up in 5 months? Perhaps I can come up w/ a nice compromise so that I feel like I'm paying down the debt yet still have some sort of cushion in my EF - perhaps using only 50% of it? That'll bring my cc debt down to $2k and leave $2k in my EF. Ultimately, I am shooting to have my EF at $10k for 6 months living expenses...

I definitely need to start saving for a down payment, however, I feel like any extra money I have should be going toward my debt or EF right now (aside from vacations -meaning my trips to visit home- and Christmas expense -an unnecessary, but necessary account to avoid overspending at that time). I can't wait until my cc is paid off, I have my EF built up, and can put more $ toward my student loan, contribute to my 401k, and start saving for a house.

BUT, I feel good that I'm at least maxing out my ROTH for now....

My opinion is you are being penny wise and dollar foolish, or making emotional decisions rather than rational ones.

If you have an emergency, the fact you have $4000 less debt will be a great thing. Sending $800/month to an EF suggests you could send $800/mo to pay off the debt as well. Because you have done neither, I am seeing a problem.

You need to change your habits.
a) get out of debt
b) stay out of debt
c) fund retirement, EF, gift fund, vacation fund etc...

If you do c) without a) or b), you are making emotional decisions and will probably not get out of debt (anytime soon). Being debt free is the single biggest financial move you can make. Having an EF is a good thing, but it is NOWHERE (not even close) to the level of living debt free.

Your decision to "charge" the move instead of using cash is proof you need to rethink how you view money, IMO. Moving is not an emergency? I'd think it is. Not catastrophic, but it is a one time thing which requires cash not otherwise in a budget. A minor emergency, if you will.

My wife racked up an $1800 credit card bill and I tapped into the EF we were saving into and paid it off. Debt is bad, we can save more next month to EF. Setback, but we are debt free, which is better than having that $1800 making interest in savings account.

I can see saving for retirement while paying off debt, but I cannot see making an EF, vacation fund and gift fund while in debt. Some of that is my long term planning side, some of it to me is common sense.

[tinapbeana]

i don't think the poster was saying she has $800 per month that's not going to debt or the EF

i think the post was saying that if the EF was used to pay off the debt $800 per month would be freed up (i.e. not being paid towards the debt anymore) and could be used to replenish the EF.