Fact vs. Fiction Archive

Fiction: There's no long-term effect if I use a little bit of my retirement savings to establish an emergency fund.

Fact: When setting up an emergency fund, withdrawing money allocated to other resources, particularly your retirement savings account, can do long-term damage to your financial picture. For starters, if you borrow from your retirement account and default on the loan, you could face serious tax implications and penalties. You're also limiting the advantage of compounding returns from the money you had put aside. Think of it this way: Taking cash out of your retirement account is like stealing from yourself in your golden years. The most common excuse for not maintaining an emergency fund is that you don't make enough money to save. Know that you don't need to put away hundreds or thousands of dollars all at once. Starting small can work just as well.

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