How can you retire on time and be comfortable in retirement? By saving and investing, of course. But before you put away money in your retirement accounts, you absolutely need to build up your emergency savings account.
More than eight in 10 households (82%) experienced a financial shock in the past year according to new data from the Pew Charitable Trusts. Typical problems included an unexpected decline in income, a hospital visit, the loss of a spouse or a major house or car repair.
More than half of those folks said the resulting financial damage made it hard to make ends meet. Pew talked with 7,000 households and focus groups in three large U.S. cities for the study.
Meanwhile, nearly six in 10 say they are unprepared now for a financial emergency, yet they say retirement remains a major concern.
Here’s the thing: Financial emergencies happen. You will lose the use of your car for some reason. You or a member of your family will end up in an emergency room and need costly care. Somebody will lose a job.
Optimism is great, but at some point in the next five or seven years something could happen. I hope your life is a easy-sailing breeze forever, but you know you will, at some point, have to come up with a few thousand dollars on the spot.
If you have no cash in the bank, that money will come from a relative or from selling something or in the form of a loan you probably don’t want to take out at unfavorable terms. It will hurt you financially and mentally.
If you have already started saving into a 401(k), chances are you will raid the account to get the cash by taking a loan out or by simply emptying it and paying the penalties. That’s what is known in the benefits world as “leakage.”
According to one study, leaks from plans amounted to 40% of our own contributions. That’s real pain over the long term. Aside from the cost of the taxes and penalties, you lose the ability to compound money into a retirement in the future. Time is what you really lose.
How hard would it be to prepare yourself for a nearly inevitable problem? It might take a few months to cobble together the cash, but imagine how much better you would feel sitting on $1,000 in a savings account. Or $2,000.
Keep on going. Before you invest a cent, get your balance up to the equivalent of six month’s salary if you can. Now you’re bulletproof. Your retirement plan or IRA can take in every cent you save and you can rest assured that a short-term emergency isn’t going to demolish your long-term goal — a safe and comfortable retirement.