Financial Planning, Retirement

Reasons To Establish A Rainy Day Fund

11/14/19 12:00 PM

Many Americans are not financially prepared for a recession, according to a new Bankrate poll. Specifically, 40 percent of surveyed adults doubt that they would be able to make it through an economic downturn unscathed, including 16 percent who said they are not prepared at all for a job loss or other financial hardship common during such a period. Although the likelihood of a recession occurring anytime soon is still low, it is always a good idea to take steps to better prepare for both your near- and long-term financial future. Among the respondents who have already tried to improve their readiness for a potential downturn, boosting their emergency savings was one of the most common actions taken.

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This is a good idea in general since we learned in September that an alarming number of U.S. adults do not have a rainy day fund that could cover just three months’ worth of their regular household expenses. Even Americans who would typically be considered more financially stable too often lack preparedness for a sudden money-related shock. For example, an earlier report from Wells Fargo and Gallup found that only 55 percent of surveyed investors with at least $10,000 in stocks, bonds, or mutual fund holdings could describe themselves as “very well prepared” to deal with an unexpected $5,000 expense. Around 8 in 10 investors (83 percent) feel very well prepared to cope with an unforeseen $1,000 outlay, but just a third of respondents could report the same level of confidence about a sudden $10,000 setback.

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“Very well prepared” in this particular survey presumably means the ability to cover a surprise expense without having to liquidate one’s investment assets, something which would likely be a lot easier to accomplish with an emergency fund in place. Moreover, short-term savings are intended to help people survive a financial hardship without dipping into their long-term savings prior to retirement. This is important because withdrawing money from a 401(k), IRA, or similar account before the age of 59½ can often result in a tax penalty. Exemptions exist but accessing your old-age savings early can still wind up diminishing your compound growth potential (less money to invest and reinvest), and in the case of 401(k) loans sometimes lead to serial borrowing.

  


 

Sources: Bankrate, Gallup, Wells Fargo

Post author: Charles Couch