We are often told how important it is to save for retirement, especially since the high cost of living continues to climb and Social Security is not enough to sustain seniors without any earnings. And although it is generally a smart idea to allocate money every month to an IRA or 401 (k), there is one scenario where you really shouldn't save for your future: when you don't have the money to deal with unexpected short-term expenses.
You Need Emergency Savings
You never know when a financial emergency can strike, either in the form of a home repair, car problem or injury. And if you don't have money in the bank to pay for such unplanned expenses, you risk filling up a lot of debt to cover them. The result? You will waste money on interest, damage your credit and make it difficult to borrow money the next time you need it.
If you are without key savings, you should build the security net that trumps all other financial targets on your radar, including retirement. Even if you neglect your nest, it may actually cause you to lose your investment growth, it is even more important to save money for the present than to save for the future.
Ideally, the Emergency Fund should contain enough money to cover anywhere from three to six months of lifetime costs. Now if you are single and do not own a home, you can probably stick to the lower end of this area, but if you have a family and a mortgage, you better focus on the higher end.
Of course, the difficult part of building emergency savings is that you don't get help from the IRS by doing so. On the other hand, when financing a traditional IRA or 401 (k), your contributions go tax-free so you save money the year you make them. But there is no tax incentive to put money into the bank. Nevertheless, it is important that you do so, because if you ignore your long-term savings, you can get enough debt that interest payments alone monopolize your earnings and force you to neglect your next-generation deal.
Now if you do not have a spare, but you do have money in an IRA or 401 (k), you may be wondering if you are set. After all, you can't just access cash in squeeze since it's yours? The problem, however, is that because of the above tax breaks you get to finance a traditional IRA or 401 (k), the IRS does not accept early withdrawals. As such, if you remove money from an account before age 59 1/2, you will face a 10% penalty on the distribution you make. And depending on the sum you withdraw, the penalty can be significant.
Let's be clear: When you have a fully loaded emergency fund, you should start contributing regularly to a pension scheme. But if you do not have any long-term savings, this must be your priority – even if it involves putting the next-person aside at the moment.