I received a question the other week that many people seem to be asking. We will leave the commenter anonymous for obvious reasons. Here is the question:
“My husband and I have no emergency savings. However, we do participate in my husband’s 401(k) with matching employer contribution. Considering today’s current conditions, would we be better served putting the money in the bank and forgoing the matching employer contributions?”
If I were in your position, I would continue to contribute to the 401(k) unless I am really feeling an oncoming layoff or financial emergency.
When Should You Forget About the Match?
I would only forgo the match if I was almost certain that a layoff was coming. If that seems to be what’s on the horizon, you should sock away as much cash as you can. It is recommended that you have 3-6 months worth of expenses in your emergency fund. Notice that I said expenses and not salary. You should have enough money saved in order to cover your mandatory expenses such as food, shelter, clothing, etc. Also remember that an emergency fund is not only for job loss. Financial emergencies can happen from almost anything. Your spouse may need to go to the hospital or your 1971 AMC Gremlin may need new tires.
If you are wondering if you should save for 3 or 6 months, it depends on your situation. If both you and your spouse are tenured teachers and a layoff is the last thing on your mind, you probably only need 3 months. If you are both car assemblers at Chrysler, you may want to have 6 months or more. You should base your savings on your job security. If you would receive a severance if you are laid off, make sure you include that money in your emergency fund. No need to save too much.
Why Continue the 401(k) Match?
A 401(k) match is free money. What other way can you get a 100% return on your money? I surely cannot think of any. Many companies offer some type of match when you contribute to the plan. The match can be something like 50¢ for ever $1 you contribute up to a certain of your salary. Others match it dollar for dollar and I have even seen some companies put in $2 for each $1 you contribute. Why on earth would you pass something like that up? It will increase your retirement savings immensely and you may even have to save less thanks to the miracle of compound interest.
Also, as a good friend reminds me, there is no better time to start saving for retirement than today!
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