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Where should I save

Question: I am 31 and a recent law school graduate. Needless to say, I have a daunting amount of school debt hanging over my head, approximately $120,000. Since graduation a year and a half ago, I've been working in a low-paying public job, which I feel fortunate to have given the difficulty recent grads are having finding legal work. It has allowed me to live comfortably. Just recently, though, I secured new employment with a private law firm, and will receive about a seventy-five percent boost in my annual income.

I've accumulated about $9000 for an emergency fund, which I keep in what used to be a high-yield savings account that now earns 1%. It's about $3000 shy of being six months of expenses. I also have a state defined-benefit pension account worth about $5500 of tax-deferred funds. My new job will offer a self-directed 401(k) with a max contribution of 2% of my annual salary, but I have to wait a year to participate in it.

I'm single and have no set plans for any major purchases in the next five years except a car. Also, I can't completely rule out the idea of buying a home in the next ten years.

My question is where should I be focusing what money I've saved? To earn a better return, should some of my emergency fund go somewhere else where I can still get at it? Also, how about the pension account? Should I let it sit for a year until I can roll it into the 401(k) or maybe move it to an IRA then to the 401(k)? I, of course, need to keep chipping away at that student loan debt, too. Thanks for any advice! Ryan, Fort Collins, CO

Answer: Let's take your questions in order. I would continue to build up your safe, emergency saving even though the return is a laughable 1%. A major reason for focusing on securing a large stash of savings is that eventually your emergency fund turns into an opportunity fund.

It gives you the financial freedom to take advantage of a good investment opportunity, to make shifts in your career and jobs, to buy a home, or reach for some other goal. One advantage of the law is that it does allow you the opportunity to move between private sector, nonprofit work, government employment, and independent entrepreneur.Savings smooths the transition.

As your savings grow to more than the benchmark 6 months to a year in living expenses you could start putting some of the additional money into riskier investments, such as high-quality bonds and stocks.

I would keep your emergency savings in safe investments like Treasury bills, FDIC-insured accounts, and the like.

I would check and see if you can participate immediately in your law firm's 401(k). A lot of times employers allow it. You just can't get a match for a year. But if the law firm says it's okay you can choose your mutual fund investments and have the money automatically taken out of your paycheck. It would would save you some paper work. You should also check with your new employer to see if you can roll over the pension stub from your previous job into its 401(k). Many firms do, but they don't have to. Otherwise, I would go ahead and open up an IRA.

And, yes, you need to keep chipping away at the student loan debt.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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