Clements defenses his contrarian advice

Jonathan Clements (of wsj.com) argued that those people in their 20s should forget the emergency reserve and, instead, focus on things like putting enough in their 401(k) to get the full company match.

If they had a financial emergency, they could always borrow against their 401(k).

What if those twentysomethings borrow against their 401(k) and then get laid off?

The current law says that if you get laid off, these 401(k) loans have to be repaid immediately. If you can't come up with the cash, you would owe both income taxes and a 10% tax penalty on the money borrowed.

Clements suggests that after pay tax penalty, 401(k) loans still going to be ahead than the emergency fund which sits in say, a savings account or a money-market fund.

- 401(k) contribution will get company match.

- 401(k) contribution is tax-deferred and saving for emergency is not.

- 401(k) also gets tax-deferred investment growth and emergency fund gets short-term interest rate that probably exceed inflation rate by 1 or 2 points.

Clements assumes that there is no certainty we will have a financial emergency. Most of us don't regularly get laid off, wrap the car around a telephone pole, or need an emergency appendectomy. In fact, many of us will make it through our entire lives without a major financial crisis.

I disagree with Clements.

We will have financial crisis sooner or later. We will change jobs - planned or unplanned, We will have car accidents.

If you can't amassing an emergency reserve equal to six months of living expenses, save $1000 for for a beginner emergency fund instead.

Also, you're repay the 401(k) loan with after-tax dollars. So, let's say your monthly interest payment is $300 and you're in the 25% tax bracket. You'll have to make $375 to make the $300 payment. Then, when you retire and withdraw from 401(k), you pay taxes yet again.