Having an emergency fund set up is one of the smartest things you can do over the course of your career. They're a safety net for when things go bad, health takes a turn, or you need to pay for something you hadn't intended to. In a financial emergency, it can also be tempting to dip into these funds when you need cash fast.
But is it a good idea to withdraw from a long term savings, 401(k) or retirement account? How much should you withdraw? And what are some of the costs associated with this kind of withdrawal?
Weighing Withdrawal Fees
One of the biggest issues with dipping into certain savings accounts is these accounts often aren't meant for short-term withdrawals. The withdrawal fees can be a big factor in why most people never take this money out.
But when it comes to short-term needs, this cost starts to mean less. If you need money, right now, to cover food and expenses, then the cost of withdrawal fees can seem like a minor issue.
You’ll need to weigh your needs against the potential cost of this withdrawal. With a retirement account, this is what's known as the opportunity cost of your withdrawal. It's a way of making account holders properly weigh when to use savings so they don't do it impulsively.
Alternatives to Using Your Savings
An emergency is an emergency, and if you need to withdraw your cash, you're within your rights to do so. But it can be a risky bet to make, and there may be other options available. Consider some of the following:
Prioritize Your Expenses
It's a fact of life that some bills need to be paid before others. Nobody wants to be in this position, but if you can't pay them when they're due, prioritize the ones that are more important first.
The crucial bills are mortgage and rent payments. Something like your internet service is important, too, but you can make a plan to find Wi-Fi more easily than finding a new home. Food is also, obviously, important. Start skipping meals and you run the risk of getting sick or just making bad decisions out of hunger.
Start looking for expenses you can reduce so you can bring your overall budget down a few notches. We don't like to give up our luxuries. That said, streaming and subscription services and high-end cell phone plans are not necessary expenses.
Remember, small savings add up. Find five different ways to save $20 each month, and you've got $100 a month on your hands. In a year, that’s $1,200 in savings.
For problems with credit cards or medical bills, take the plunge and call your lender right away. The best thing you can do is to find a way to plan out your payments with whoever you owe them to. It's in their best interest to find a way to get some money instead of nothing. It's not ideal, but it's in everyone's best interest to compromise.
Don't wait until you are seriously delinquent, though. Do it early, and they'll be more willing to negotiate. Credit card companies have been known to lower interest rates in certain cases, or even defer payments temporarily. Your mortgage company may let you restructure your loan. Even utility companies have subsidy programs to keep your electricity on when payments are an issue.
Secure Additional Funds
Not everybody can have a sizable emergency savings fund set aside. This is where most people end up looking for extra money.
Applying for a personal loan or new credit card might be an option. However, this can make the problem much worse if you don't go in with a plan. High interest rates and new monthly obligations will put a lot of pressure on you if you don't have the right plans in place to pay them off over time. Borrow too much, and you could find yourself in a spiral you can't recover from.
Do you own your home? Consider a cash-out refinance or a home equity line of credit (HELOC). Both of these options are a great solution if you have the time it takes to go through a refinance. You might also be able to lower your interest rate, monthly payment, or loan term in the process.
Do you currently have a 401(k) or 403(b)? You may be able to borrow from these accounts without being taxed or penalized in any way, provided you stick to your repayment plan. And you may be able to borrow up to 50% of your vested balance, depending on the type of account you have. Plus, the interest you’re paying goes back into your account.
If you have investments or retirement accounts with enough money, withdrawing money from your retirement account is almost never recommended and should be a last resort. You will likely be penalized with additional fees and any amount you withdraw may be taxed at a higher rate than if left until your actual retirement. This makes it very important to know when to withdraw investments and when to look for other options.
Government assistance is put in place in order to help in times of financial crisis. There are social programs designed to help people get through unexpected financial difficulties.
If you've lost your job, there's a chance you're already entitled to unemployment benefits. If your health insurance was tied to the job you lost, look into the health insurance marketplace as a health insurance option. You may qualify for state or federal benefits like Medicaid or Social Security Disability.
Make It Through a Financial Emergency Like a Boss
Keep your cool, don’t panic. The same bills as yesterday need to be paid today. It's up to you to find that money in whatever way makes sense to you. And while it's not recommended, that can mean going into your savings or retirement funds, if the situation becomes serious enough. What matters is that you go into it with a plan to use as little as possible and pay it back as soon as you can.
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