Friday, April 3, 2020
MERS CentsAbility Blog


An Emergency Savings Account Can Save Your Retirement

An Emergency Savings Account Can Save Your Retirement

1:41 Min Read

First the car broke down, then the dishwasher stopped working, and now the dog is sick. Sometimes the old saying, "When it rains it pours," seems to ring a little too true. When you need money to pay large, unexpected bills, where do you turn?

Many people use credit cards or borrow from their retirement account when an emergency arises. But those aren't always the best choices. One step toward achieving financial wellness is having an emergency fund to use for unanticipated expenses.

Easy Often Equals Expensive

It's easy to use a credit card to pay for a car repair or a trip to the vet. But if you don't pay off the credit card bill right away, interest increases your balance. After a few months, you could be carrying a large balance that becomes a financial burden in your life.

Hands Off Your Retirement Plan Savings

When you have an emergency, you may be tempted to borrow from a retirement account such as your defined contribution or 457 plan. After all, it's your money that you've saved. But, borrowing from your plan — if allowed by your employer — may not be a smart choice. The money you take out of your account is no longer invested and benefiting from tax-deferred growth, and you will have to pay back the loan. Additionally, if you aren't able to contribute to the plan while you are repaying the loan, your retirement savings could suffer.

Building Your Emergency Fund

Your goal should be to set aside three to six months' worth of expenses in an account you can access when needed without paying penalties. That amount may seem daunting, but saving even a small amount each month can help you build your fund. Cutting back on your out-of-pocket spending can free up money you can set aside in your fund. Consider putting a part of any bonus or raise you receive in your emergency fund to help build it up.

Emergencies Only

It may be tempting to use emergency funds for things like vacations and home renovations. Yet, it is important to save that money for financial emergencies. Any time you take money out of your fund, make sure you replenish it as soon as possible so you're prepared the next time the dishwasher dies.

Need a little extra help planning? Check out the emergency savings calculator on our website here.

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