Recently we learned that setting aside more money for retirement is one of the top New Year’s resolutions for Americans in 2018. Unfortunately, that goal could prove to be rather difficult for many people to achieve because only 39 percent of adults surveyed this month by Bankrate said that they would be able to cover an unexpected expense of $1,000 with their savings. Around one in five respondents said that they would instead have to use a credit card to handle the surprise outlay, 12 percent would turn to friends and family for the funds, and 5 percent would need to take out a personal loan. Such figures are even more alarming since one in three respondents said that they or someone in their immediate family had run into a "major" unforeseen expense last year, with the average outlay being $2,500.
Bankrate’s chief financial analyst Greg McBride added that “Unplanned expenses can pop up at any time, and your best protection is having an emergency savings cushion. Not only are returns on savings accounts rising, but it acts as a buffer from high-cost credit card debt or other borrowing.” Moreover, having an adequate short-term fund can help you avoid tapping into your retirement savings early in order to cover a surprise expense. One far too common way that this occurs is through the use of the flexible loans typically available to 401(k) plan participants. While having the ability to borrow from your 401(k) can definitely be useful in the event of an emergency, it is generally a good idea to never touch your long-term savings until you are actually ready to retire. Further, 401(k) plans are intended to help participants amass a significant retirement nest egg through routine, tax-advantaged contributions and the return generated from properly investing those savings. Abusing the borrowing privilege hinders the effectiveness of this retirement tool, which is a waste considering just how powerful consistent 401(k) participation can be.
Sources: BankratePost author: Charles Couch