First the car broke down, then the dishwasher stopped working, and now the dog is sick. Sometimes the old proverb, "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?
The unfortunate reality is that most people don’t have a healthy savings account to pull money from in case of emergency.
Many people use credit cards or borrow from their retirement savings plan when they have a cash crunch. But those aren't the healthiest choices. One step toward achieving financial wellness is having a financial 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 will be added to your balance. After a few months, you could be carrying a large balance that becomes a financial burden in your life.
Hands Off Plan Money
When you have a large expense, you may be tempted to turn to your retirement plan account balance. After all, it's your money that you've saved. However, borrowing from your plan (assuming the plan permits participant loans) may not be a smart choice.
The money you take out of your plan will no longer be invested and benefiting from potential tax-deferred growth, and you have to pay back the loan. If you aren't able to contribute to the plan while you are repaying the loan, your retirement savings could suffer. If you make a withdrawal instead, it will be subject to ordinary income taxes plus, if you are younger than age 59½, an additional 10% tax for early withdrawal.
Having a financial emergency fund gives you peace of mind AND helps you build long-term wealth.
Building Your Financial Emergency Fund
Your goal should be to set aside three to six months' worth of expenses in a financial emergency account that you can access when needed without paying penalties, charges, or termination fees. 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 portion of any bonus or raise you receive in your emergency fund to help build it up more quickly.
Emergencies Only
You should use the money in your fund only for financial emergencies, not for things like vacations or non-emergency home renovations. And any time you take money out of your fund, make sure you replenish it as soon as possible so you're prepared for the next unpleasant surprise.
Build Your Emergency Fund
If you’re interested in learning how to grow your personal wealth, use our LPL research information to educate yourself on high-growth money strategies. If you would like to talk about how you can attain financial independence, contact us today.