Back on Track

I have now been able to restore my 401k deduction to 15% of my gross. Since mid-January I lowed my deduction percentage to only 1% to free up some cash to pay down debt and pay bills. I am hoping to keep my deduction at 15% for the rest of the year. If I am able to do that then my annual 401k savings would be around $13,700. I am going to keep my fingers crossed.

My 401k balance is over $7,000 lower now then it was last October due to the crappy stock market lately. Again, I have to keep focused on the long term and not the short term.

What is an adequate emergency fund?

The news is full of stories that we are heading into a recession so what constitutes an adequate emergency fund in such uncertain times? I have read that 3 months is a good cushion but I am pretty sure that 3 months is not nearly enough to keep you sleeping well in a full blown recession. Currently, I only have a little over a one month cushion in my emergency fund. I am fortunate to have a stable job but I still realize that one month is no where near enough.

Should I focus on my emergency fund at the expense of contributing to my 401k? My gut is telling me to continue to build both at the same time. Once I get a 6 month cushion (in about 15 months) I will save less cash and fully fund my 401k and Roth IRA. I believe my modified adjusted gross income will still be under the limits so I can still fully fund it in 2009.

In 2008 my budget calls for me to contribute $15,750 to my 401k and $1,200 to my Roth IRA. Saving for retirement and building my emergency fund are the two most important goals I have for the foreseeable future.

Index fund vs. actively managed fund

I was recently reviewing my retirement portfolio costs and noted how much lower the costs are on my index funds. More than 60% of my mutual funds are in index funds. My actively managed funds include the Vanguard 2025 Target and 2035 Target funds which also include index funds even though the funds themselves are considered to be actively managed. My average cost is .21% which is lower than the industry average of 1.27%. That means my returns are 1% higher just because of the low fees. That difference adds up over time. For example, if I were to calculate the future value of my $90,000 in retirement assets in 25 years using 8% it comes out to $231,208. However, if I get a 1% higher return the value in 25 years is $291,120, almost $60,000 more! The scenario assumes that I don’t add anymore money to the original $90,000 balance. Increasing my savings would of course make the difference even higher.
I am not going to get into the whole argument over which is better indexed or actively managed. I feel comfortable with where my money is invested and that is all that matters. If I were to visit a financial planner I would probably hear that I have a lot of overlap in my funds. Specifically, I own various amounts of Vanguard Mid-Cap Index in my IRA, Roth IRA, and my 401k. I plan to get some financial advice next year once my Vanguard fund total exceeds $100,000 which makes me eligible for a reduced cost ($250) financial plan that they normally charge $1,000 for.

I have decided to max out my 401k

August 23, 2007
When I calculated the tax numbers it just made more sense to put 15% of the bonus into my 401k. For the next 12 months I plan to set aside 15% of my salary in my 401k. The next thing I will need to think about is increasing my Roth IRA contribution to the max allowed. While I had originally planned to use a portion of the bonus to pay down debt I have opted against that as my credit card debt is at 0% forever as long as I use my card twice per month. I will lower my tax bite significantly by putting the funds in a tax deferred account. I will use about $1,500 to bolster my emergency fund. That will put my emergency fund at over $5,000 by the end of September. My paycheck will be just a little lower but that is fine. I am on track to meet two of my 2007 goals: 1) An emergency fund of at least $5,000 and 2) maxing out my 401k.