This financial faux pas has become a common scapegoat for a growing number of people in this country, and unfortunately, the number doesn’t seem to be going down. “Using retirement savings to cover an emergency is a permanent setback to retirement planning,” says Bankrate.com chief financial analyst Greg McBride.
He says “One in four Americans don’t have an emergency fund.” And with the amount of retirement savings withdrawals on the rise, it is clear that people need to get in the habit of designating a portion of their income to an emergency-only savings account.
You may be thinking, “It’s not as easy as it sounds!” …and I am in total agreement with you. I have found it to be increasingly difficult to designate funds for savings without touching them.
But there’s hope. If you ask yourself these 3 questions (courtesy of Kelly Smith, Junior Writer for the Penny Hoarder) before you decide to withdraw from a retirement plan or savings, there is a greater chance that you will make the right decision…
- Is it unexpected?
It’s important for you to decide whether or not a circumstance should be labeled “unexpected” or just a reoccurring inconvenience.
Example #1- Your car getting towed is certainly an unexpected expense, and you should without a doubt allow yourself to dip into those emergency funds (if need be.)
Example #2- That new iPhone upgrade or tickets to that concert (that you neglected to budget for) do not count as unexpected, sorry.
- Is it urgent?
Ask yourself, do I need to cover ($) this now or can it wait another week or two?
Prioritization is an important component in maintaining a savings amount. Referring back to Example #1- considering that your car is most likely your primary source of transportation, it would classify as urgent.
In comparison, buying a gift for your cousin’s birthday (that you forgot about) is not considered to be urgent. You might get on your cousin’s naughty list, but at least you didn’t dip into your savings for something you would surely regret.
- Is it necessary?
It’s important to know how to decipher a necessary expenditure from an unnecessary purchase. AKA, your utility bill takes precedence over a shopping trip with your friends that you didn’t plan in your budget.
Quite often, I have found myself experiencing this dilemma. Ironically, the week after my paycheck graces me with its presence seems to be when I feel the urge to buy everything in sight. Just remember, another 7 or 10 day wait won’t make a difference for something you don’t really “need.”