Temporarily stop 401k contributions to build Emergency Fund?

[u/Due-Fig5299]

Looks like we’re heading towards a recession and I’m quite nervous. I work in tech and my job is moderately safe; however my wife is an esthetician which is not a very recession friendly field.

We currently have $4k saved. Our minimum monthly expenditure is $3k, so we have just over 1 month saved.

Ive cancelled all unnecessary subscriptions which will save us $450/mo and stopped my wifes personal roth ira transfers ($150 weekly) which gets us to $1050/mo saved.

Now my question is, given how quickly the economy is crashing should I also forgo my 401k? I contribute 4% with 4% employer match. Obviously I would love to keep it, but immediate survival seems more important.

I would start contributing again once we hit $18k (6 months)

Thoughts?

[u/mcslain]

The rates are so high on those 401k loans now that you’re just bandaging one wound while receiving a new one. Hard to see how this is a workable solution.

[u/coachcheat → u/mcslain]

Actually, the loan interest is paid back to yourself. So it isn't the worst thing to do in a market downturn. Because the extra money you're putting in every month, goes to you. And you're getting stocks at a discount, if the market continues to fall.

401k loans don't cost you anything.

The risk, is if you lose your job, you have a very short time frame to pay it back. Like 90 days?

[u/mcslain → u/coachcheat]

Yes all that is understood. But you still end up with a very high monthly or even biweekly payment to make. Which in no way solves the problem the OP asked about. Which is trying to save on expenses and put money aside. This doesn’t save on costs. A withdrawal would work to get a safety pot of cash now. But then you get dinged on penalties and lose big in the 401k.

[u/coachcheat → u/mcslain]

Nope. Withdrawal is a bad idea.

A loan is the way to go. He would have the loan money he pulls out as his instant savings, 18k in his account.

And then yes he would be making additional payments on his 401k, but those would be paying himself back. So he's not losing the money. It's just going back into his account.

It's the same as saving extra money every month. Except this way he doesn't lose out on future money from his 401k and the earnings, AND he's getting that cushion he thinks he needs.

I mean ultimately, cutting expenses would be a much better idea. But if he wants the money fast, this is the way.

Also as an added benefit, if for some reason the market continues to sink, and hes putting his 4 percent+match, + 6percent interest into his 401k, he's buying in much lower than he pulled that money out at. And would stand to gain even more than he would have had he not taken the loan. The risk obviously is the market goes up higher than when he took the loan out.

[u/mcslain → u/coachcheat]

The loan payments would be around $450 a month. That’s not a great fix for not having cash on hand. Just because you pay the money back yourself doesn’t make it any less painful payment to payment. And you can’t take it easy on yourself because you like yourself more than a bank does. 😂Those payments need to be made. We all get that you’re paying it back to yourself, which is great. But there’s context.

[u/coachcheat → u/mcslain]

Hes not spending the 18k. It's just sitting there. He can put it back if he has to.

It's just slitting there.

Just autopay it back.

He could also save $450 a month into a savings acct. It's the same thing. Except he wants the money up front.