Using your 401(k) as an Emergency Fund? Are you insane?!

my face.Have you ever heard this before? I seriously couldnโ€™t believe i was hearing 2 โ€œadultsโ€ talk about this during this morningโ€™s commute. I havenโ€™t been around this earth nearly as long as they have, but I can tell you flat out that itโ€™s a stupid idea โ€“ i wonโ€™t even sugar coat it.

What i find funniest though, is that i was literally reading the pros and cons about taking out a 401k loan in this monthโ€™s Money Mag while these 2 boneheads were discussing it! hahaโ€ฆIf i had bigger balls, and werenโ€™t in the quiet car, i SO would have slapped them upside their heads and forced them to read the article. but i didnโ€™t. and now here i am typing my thoughts away in hopes it will find itโ€™s way towards them one day!

Now, before i continue, there ARE times when someone might need to access these 401k funds, but (a HUGE but), itโ€™s generally not a good idea. Obviously if you were in a serious jam and needed money no matter where it came from, then Yes it is an option, but Iโ€™d pretend itโ€™s not there unless absolutely necessary.

Everyone has their own idea of an Emergency Fund, but in theory itโ€™s a holding place for liquid funds that can be accessed ASAP in case anything you deem as an emergency comes up.

So the concept of using your 401k here is already shot down considering it would take at least 2 weeks to get your hands on the money anywayโ€ฆunless it was a SUPER big emergency that you were planning for ahead of time, which really makes no sense. unless youโ€™re a fortune teller, in which case bravo ;)

So why am i, and many others, so against it? Well, to start you get taxed BIG TIME whenever you cash out: You get the privilege of paying the regular income tax, PLUS a 10% penalty on top of it if youโ€™re under 59 1/2. Then, of course, the money is out of your retirement account and will be much harder to build back up as time goes on. Add on that todayโ€™s economy and the fact that youโ€™d be pulling the money at the absolute worst time (bear market), and youโ€™ve got yourself a sticky little situation my friend.

Now, the other option it to take a loan out from your 401k. In this case, youโ€™d pay it back on a scheduled timeframe, and all the interest (usually prime + 1%) would go back to yourself too as youโ€™re essentially borrowing from yourself here. A much better option than the above, but still not the best in my opinion. Sure youโ€™d be paying yourself back, and losing possibly only a little over time all depending on the amount you take out and the market of course, but itโ€™s pretty damn risky. The main reason? If you terminate your job (or get terminated), you usually have to pay back the entire amount borrowed within 60-90 days!!! OUCH that would hurt.

So yes, as you can tell iโ€™m not a fan of taking out your 401k money at any point. But again, thatโ€™s just me talking about living a financially perfect life :) We all know $hit happens, and sometimes youโ€™re forced to do things to remain afloat. All i ask is that if you find yourself in one of these sticky situations, make sure you do some good research first and come up with a solid game plan.

And for the love of money, PLEASE set up a side account for your Emergency Fund so contemplating it wonโ€™t ever occur! I swear youโ€™ll sleep happier at night.

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