Put Down The Foundation First

Mary and her husband have $400,000 in retirement but no emergency savings. They have no debt other than their mortgage, and they don't know what to do about Baby Steps 4 and 6.

QUESTION: Mary in Los Angeles and her husband have $400,000 in retirement but no emergency savings. They have no debt other than their mortgage, and they don’t know what to do about Baby Steps 4 and 6. Dave suggests temporarily stopping the 401(k) to get their emergency fund completed.

ANSWER: I would temporarily stop all 401(k) contributions. Here’s the key: It’s temporary. The problem is right now, if you have an emergency, you’re going to cash out your stupid 401(k). The stupid government’s going to penalize you 10% plus your tax rate—about a 40% kick in the teeth because you guys didn’t do stuff in the right order. You tried to put the roof on the house before you laid the foundation blocks. Temporarily—we’re talking six months max—we’re going to stop adding to retirement and load that emergency fund up.