Emergency fund plus “security” money

[Ninepoint5]

I’ll keep this short and to the point. I owe $18k to repay a 401k loan (4.5%) that I took out 1.5 years ago. I have $25k in EF and another $25k in “mattress” funds for worse case scenarios. This in part was something my dad has instilled in me about having $ close by other than a bank in case something “bad” ever happened and the need for cash was near and outside the banking system.

I know I shouldn’t have that much laying around not working for me. So I guess I’m curious on the thoughts here about should I repay myself and knockout them 401k loan w/ mattress funds or EF? Any insight would be appreciated….

 

[finnski1]

Well with a 401k loan the interest rate you pay(4.5%) is actually paid back to yourself and is kind of a forced savings to allow you to put that much more in your 401k. Since your balance is so low I would not do anything except continue to pay the standard monthly payments per month. Save those emergency and mattress funds for something even more serious down the road. The only thing you are missing out on is the opportunity costs of not having the money invested.

 

[Ninepoint5]

Well with a 401k loan the interest rate you pay(4.5%) is actually paid back to yourself and is kind of a forced savings to allow you to put that much more in your 401k. Since your balance is so low I would not do anything except continue to pay the standard monthly payments per month. Save those emergency and mattress funds for something even more serious down the road. The only thing you are missing out on is the opportunity costs of not having the money invested.

Those opportunity costs is what I am concerned about with the emergency $ and “mattress” $. Is there another investment vehicle I can put the EF in other than the money market account?

 

[GrayHare]

Unlike cash. precious metals generally keep pace with inflation. You can put gold and silver coins in your mattress, though it might become a bit lumpy to sleep on.

 

[CSdot]

Doesn't having an outstanding 401k loan prohibit your ability to contribute further to your 401k?

If it were me I would pay off the $18K 401k loan with one of the two $25K pots of money you have, then rebuild your savings from what you spent. Better yet, take $9K from each to pay off the $18K loan, then rebuild from there.

 

[Ninepoint5]

Doesn't having an outstanding 401k loan prohibit your ability to contribute further to your 401k?

If it were me I would pay off the $18K 401k loan with one of the two $25K pots of money you have, then rebuild your savings from what you spent. Better yet, take $9K from each to pay off the $18K loan, then rebuild from there.

No I am still able to max out my 401k

 

[RxMan]

Also keep in mind that if you leave your current employer that loan on your 401k will be due in full. If it were me I’d use some of your available funds and just pay it off.

 

[RetiredHappy]

We don't believe in mattress money as they make no money. I would use mattress money or EF to pay off the 401K loan.

 

[RobbieB]

I like to keep 10 grand (benji's) in the safe, but no more.

 

[Winemaker]

My old boss and I talked finances one day about 25 years ago. He kept $5,000 in the kitchen drawer in case an unexpected expense came up, he said like buying tires for his daughter's car. He had a $4,000 credit card balance that he paid a minimum payment on, he said, sometimes a little more. I told him to pay off the CC with the drawer money, and use the CC for unexpected expenses. He wouldn't do it, he liked having cash on hand.....

 

[target2019]

18K removed from 401 plan, so out of market, and lost opportunity. Then take 4.5% from earnings and add.
Meanwhile, keep 50K in no interest accounts.
It could happen that the market crashes and you end up buying lower cost shares. In the long run that 18K will be a blip.
Me, I'd pay off the loan. We're all different of course.

 

[finnski1]

Those opportunity costs is what I am concerned about with the emergency $ and “mattress” $. Is there another investment vehicle I can put the EF in other than the money market account?

Well the opportunity costs I was talking about were the $18k you still have out of the market presuming they were in some kind of equity fund to begin with. I personally don't believe in being 100% in the market but that's just my opinion.
In other words I would not be worried about low or zero return on your emergency funds. I have a lot more than that in practically 0% interest cash myself. It doesn't bother me. I don't however believe in mattress money or actual cash lying around. I simply keep it in checking, money market or savings account type vehicles. I don't know how much EF you are comfortable with but you could take $20 k of that right now and by an I bond of $10k each for you and your wife. Just know it would not be available for 12 months and then after that you would give up 3 months interest if cashing it in before 5 years. Right now the interest rate on them is 7.12% for the next 6 months before it gets adjusted again. I just bought my first ones ever in November for the same reasons as you are contemplating.

 

[The Cosmic Avenger]

My old boss and I talked finances one day about 25 years ago. He kept $5,000 in the kitchen drawer in case an unexpected expense came up, he said like buying tires for his daughter's car. He had a $4,000 credit card balance that he paid a minimum payment on, he said, sometimes a little more. I told him to pay off the CC with the drawer money, and use the CC for unexpected expenses. He wouldn't do it, he liked having cash on hand.....

That was good advice, Winemaker, and it is why I think Ninepoint5 should pay off the loan with the mattress funds, then if they feel like they really need that above and beyond your EF, put the loan payment back into the mattress every month. (Of course, I think it should just be added to the EF, but that part is more a matter of preference.)

 

[Ninepoint5]

All great feedback…appreciate it! Merry Xmas everyone

 

[SnowballCamper]

Maybe put part of that EF + mattress fund into an I-bond for a much better return. It has to sit for a year, and then takes a couple days to get it out, but the return is infinitely better than the mattress's return (0%).

 

[Gumby]

I-Bonds, currently 7.12%