The Importance of Building an Emergency Fund Before Maxing Out Your 401(k)
Make certain you're set for emergencies
It's definitely important to bring plenty of savings with you into retirement so you don't end up reliant on Social Security alone. But before you max out your 401(k) plan -- this year or in general -- you'll want to make sure you're set as far as your emergency fund is concerned.
What should your emergency fund look like?
- Minimum Total: Three months' worth of essential living expenses
- Optimal Total: Six months' worth of essential living expenses
- Unique Industry Role: Consider nine to 12 months' worth of living costs
All told, it's a very good thing to max out 401(k) plan contributions. But your emergency fund should absolutely take priority over your 401(k). If you need money in a pinch, tapping your 401(k) plan prior to age 59 1/2 could result in a costly 10% early withdrawal penalty, whereas tapping a savings account should cost you nothing. Keep that in mind before you make the decision to pump more money into your 401(k).
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.