What’s my next step?

Question

I just reached a HUGE milestone and I am debt free!!! Now my next step is to have a 6 month of  emergency fund. Which is where my question starts. Should I invest in a Roth IRA ($500/ month) and save for 6 months of an emergency fund? I calculated it and it should take me 4 months to reach my 6 month of expenses if I don’t save for a Roth. What should I do?!

Shiloh Lundahl · Answer

@Ivan Melendez building up an emergency fund is important. In my opinion, it is more important than getting out of debt. People like Dave Ramsey preach very strongly about getting out of debt without distinguishing what type of debt to get out of. For instance, I also wanted to get out of debt, so I paid off a $10,000 - $15,000 student loan that was at 2.25% interest spread out over 20 years or so that got dropped to under 2% for 3 years of I time payments. The payment was around $125 a month. I wish I hadn’t of paid off that loan. That 10-15k could have been really handy to use to invest with such a low interest rate that I kick myself for wanting to get out of debt so badly that I didn’t do what was financially wise because I was simply brainwashed into believing debt was so bad. Now I am in debt around 9 - 10 million dollars and that debt makes me a lot of money that I wouldn’t have been able to create without it. So I am now grateful for debt that makes me money.

As far as building up an emergency fund, I would encourage you to save up 20k as fast as you legally can and then use that 20k to start to invest in real estate. Then save another 5 - 10k for your own emergency fund. But truthfully, using real estate is an easier way to fund an emergency fund than saving money is.

Patrick Blanchard · Answer

@Ivan Melendez Hi! First, big congrats to you on becoming debt free!! That’s awesome! I personally know how good that feels.

In terms of your question,  it’s never a simple, straightforward answer. This is because everyone’s goals and the way people work with money is always different. That said, some general thoughts (not investment advice 😁): having an emergency fund is never a bad thing to have. It opens up options for you to save more money down the road. And it’s there in case the worst happens. Are you sure you’re calculating the ER Fund amount correctly? Be sure to include only those necessary expenses, like shelter, food, and utilities.

If you want to do both, an option could be: set a short term goal of building a “baby” emergency fund of about 3mo of living expenses and then switch to putting some money away in the Roth. After a month or two, you could refocus back on building the ER fund to the 6mo of savings. Whatever you, don’t “split the difference” and put $250 in each per month.. it takes a lot longer to hit goals that way and most people get discouraged unless they have an accountability partner. Congrats again on paying off the debt!!

Randy Bloch · Answer

i would not put any money in a retirement type account (Roth, Traditional, HSA) that I am considering to be an emergency fund as there are consequences to accessing those type of account in emergency.  Also, I would not save up an emergency fund and then take it and invest in real estate with no emergency fund.  You should have the emergency fund and the amount you want to invest in something else like real estate...now I did not have that when I started and I am sure many other did not as well, but it will help you sleep better.

I had a significant emergency with sewer line backup that resulted in 35k in immediate repairs to my duplex.  Having an emergency fund made this much less stressful...now sense I have stable W2 job I could have probably survived this with taking on credit card debt....but then I would had to dig out from under that.

What’s my next step?

Most Popular Reply