We are often told how important it is to save for retirement, especially since senior living costs keep climbing and Social Security is not enough to sustain seniors in the absence of external income. And while it's a smart idea to allocate money every month to an IRA or 401 (k), there's one scenario where you actually should not be saving for your future: when you do not have the money
You need emergency savings
You never know when a financial emergency might strike, whether in the form of a home repair, vehicle issue, or injury. And if you do not have money in the bank to pay for such unplanned expenses, you will risk racking up the debt to cover them. The result?
If you're without emergency savings, building that safety net should trump all other financial targets on your radar, including retirement. Though neglecting your nest egg could indeed cause you to lose out on investment growth, it's still more important to save money for the present than to save for the future.
Ideally, your emergency fund should contain enough money to cover anywhere from three to six months' worth of living expenses. Now, if you are single and do not own a home, you can probably stick with the lower end of that range, but if you have a family and a mortgage, you're better off focusing on the higher end
Of course, the tricky part of building emergency savings is that you do not get any help from the IRS in doing so. By contrast, when you fund a traditional IRA or 401 (k), your contributions go in tax-free so you're saving money the year you make them. But there is no tax incentive to put cash into the bank. Still, it's imperative that you do so, because if you ignore your near-term savings, you might rack up enough debt that your interest payments alone monopolize your income and force you to neglect your nest egg later on
Now if you do not have emergency savings but you do have some money in an IRA or 401 (k), you may be wondering if you're set. After all, can not you just get that cash in a pinch, since it's yours? The problem, however, is that because of the aforementioned tax break you get to fund a traditional IRA or 401 (k), the IRS does not take kindly to early withdrawals. As such, if you remove funds from either account prior to age 59 1/2, you will face a 10% penalty on the distribution you take.
Let's be clear: Once you have a fully loaded emergency fund, you should absolutely start contributing to a pension plan on a regular basis. (19659011) fool.insertScript ('facebook-jssdk', '/' ') /connect.facebook.net/en_US/sdk.js#xfbml=1&version=v2.3 ', true);
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