Should You Forgo A Match From a 401(k) In Order to Start an Emergency Fund?

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 50ยข 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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13 thoughts on “Should You Forgo A Match From a 401(k) In Order to Start an Emergency Fund?

  1. Michael Harr

    One important point I would add is that if the match is not vested and you don’t plan to stay through the vesting period (usually 5 years), I would skip the 401k and put money into the emergency fund. In addition, if you feel like your job might not be as secure as you like, shift the equivalent of 3 months’ worth of expenses or more into cash. This is on the vested portion only; remember, a 401k match is only good if you’re there long enough to cash it in.

    An emergency fund is the most important part of your financial foundation and without one, you are far more prone to being forced into a bad position. As an example, if you don’t have an emergency fund and the market tanks (like it has), you’ll be more likely to sell at the bottom, or if you do lose your job, your souce of cash is a retirement plan that will cost you income taxes and a penalty. As the old saying goes, cash is king.

  2. Miranda

    I agree that an emergency fund should be a major priority. Is there any way to cut back on some unnecessary expenses and work on an emergency fund while getting the company match? Although I agree that what you do is dependent on job security and whether or not the match is vested.

  3. Adam Post author

    @Mrs A – If you are laid off or quit your job, you can roll your old 401(k) into the new company’s 401(k) or a traditional IRA. I would recommend rolling it into a traditional IRA as you will have more options for investments and less fees.

    @Michael – Great point on the vesting. There is no point in getting the company match if you are not going to see it for five years. Most companies are not that stringent but some may still be. If you think the company may not be around until you can get those funds then sure, save for the emergency fund.

    I think you are also getting at taking a 401(k) loan in your comment. I would rather see someone have an emergency fund set up outside of their 401(k). If you take out a loan, you will then be paying it back with after-tax money. You will also be taxed again when you take it out during retirement. A double wammy! Also, I would like to start a new saying, “Free Money is King”!

    @Miranda – Great comment! You hit the nail on the head there. Why not just cut back on some things to get that emergency fund started? Do you really need to eat out or have the premium TV package? Just cut back on some things to start the fund. It will still allow you to get the match!

  4. Pete

    What Adam said. I’d keep getting the free money with 100% return unless I thought a layoff was imminent. Of course if you’re not vested, that is another consideration – i may start building up that emergency fund then as well.

    In my current situation I’m building up my 6 months as fast as I can and only after that is done I’ll start adding to my 401k again. (i’ve got no match.)

  5. Ken

    I would suspend matching 401K investments until you get a $1000 emergency fund. It makes no sense to contribute to retirement when a washer repair would cause you to go to your VISA for a bailout. Even though your leaving free money behind, murphy will visit you with an unexpected expense. Once you get the 1000 in a savings account contact your emplyer and begin matching again.

  6. Matt @ StupidCents

    Michael is right on…if the match won’t be vested prior to you leaving your employer (or feel a layoff was coming) then that is probably the only time I would not contribute to your 401k.

    Luckily, my wife and I have company sponsored 401k’s that do not have a vesting period, so there is no hesitation to contribute to get the max company match.

    Instead, I would recommend investigation a self-directed rIRA which allows you the flexibility of contributing to retirement while building an emergency fund.

    Stupidly Yours,


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  8. Dusty

    In my situation, having an emergency fund would be the best decision. Having a fully funded emergency fund makes my wife feel safe and secure. She is able to confidently raise our son, buy healthy foods and rest securely knowing that should anything happen, we would be able to ride out the storm.

    Passing up the free money may not make financial sense, but it could make emotional sense (which is not always a bad thing).

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