This week I came across an interesting article from USA Today about an early 40′s couple with a combined income of $225,000 per year and retirement savings of $330,000. You’d think they were in good financial shape, but the problem is they have no cash or emergency savings stashed away. The article shares they needed a new roof in 2009 and had to borrow from their 401k’s and used credit cards to overcome other financial challenges. Unfortunately, they can’t seem to put enough money back for savings because there isn’t any left after they pay their bills. The USA Today article provides three helpful tips that may make sense if you’re in a similar situation.
1. Cut Expenses
Certainly it’s important to cut expenses to save more. Personally, I think you have to establish a budget first, before you can really get a good idea of expenses. I know some people cut their expenses down to almost nothing, but still can’t save. This is generally when you have to work to increase income to offset expenses.
2. Stop Investing in Your 401k [Temporarily]
I know this advice might raise some eyebrows, but I agree that the first priority is emergency savings. If you’re not making any progress on your savings, pausing the 401k for 6 months or a year may provide the cash savings you need. However, you have to be disciplined to begin investing your 401k again after your emergency savings is established.
3. Pay off Debt
Certainly, getting out of debt provides more money to be used for cash savings. It’s important to avoid any temptation to accumulate more debt (new cars, etc.) which makes matter worse. Hopefully, by the time you have your savings established the debt will be paid off too. The extra money used to pay off the debt can then be allocated to save even more or contribute to retirement.
Overall, I thought this was pretty good advice for this particular couple’s situation. Of course, every situation is different, but for them it probably makes a lot of sense to pause the 401k investing for a while. If you can’t make forward progress in building an emergency fund after cutting expenses, pausing investing is probably the right choice. If you don’t have an emergency savings account you’ll end up going into credit card debt sooner or later.
Do you think it’s wise to stop investing in your 401k to budget for your emergency fund?
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