Do you have less than $1,000 in your savings account? If so, you’re not alone. A 2016 study by GOBanking Rates found that 69% of U.S. adults had less than that much in their accounts.
This can be dangerous. Not having money in savings – or in an emergency fund – leaves you vulnerable to life’s emergencies. If your car needs a new transmission, how do you pay for the repairs if you don’t have money saved? What if your home’s roof springs a leak? Too many U.S. adults would simply put the repairs on their credit cards, adding more high-interest debt to their lives.
However, are there times when it makes financial sense to withdraw money from your savings account? Are there ever instances when tapping that account will prevent greater financial harm?
There are. But these times are rare. In a perfect world, you’d keep building those savings. But if you’re faced with a few specific financial challenges, there are times when draining your savings makes sense, as long as you have a plan to build your saved funds back up again.
To Cover an Emergency
James Nowlin, author of the book The Purposeful Millionaire and chief executive officer and founder of Austin, Texas-based Excel Global Partners, says that it makes financial sense to tap your savings when a real financial emergency arises.
After all, that’s what savings are for: to help you cover life’s emergencies without having to add to your existing debt load.
“If there is nothing else you can do in case of a true emergency, such as your car breaking down, then go and tap into your savings for help,” Nowlin says. “Not being able to go to work on time because of a broken-down car will be a costly deal in the long run.”
When High Interest Rates Are Making Your Debt Grow
Monica Eaton-Cardone, co-founder and chief operating officer of Clearwater, Florida-based risk-mitigation firm Chargebacks911, says it makes sense to use your savings to pay off debt that comes with high interest rates. Usually, this means dipping into your savings to pay off your credit card debt – debt that always comes with higher interest.
The reason? That credit card debt can grow quickly each month if you aren’t paying it off in full. Blame the high interest rates for that. It makes financial sense to dip into your savings if you can eliminate this debt.
“You will be better served by paying down the debt with money from savings,” Eaton-Cardone says. “You’ll almost always save more paying off high-interest debt than you’ll gain from a lower-interest savings account.”
When You’re Buying a Home
You can reduce the size of your monthly mortgage payment by coming up with a higher down payment when buying a home.
Let’s say your home comes with a purchase price of $200,000. If you can only come up with a down payment of $5,000, you’ll have to finance $195,000. If you can instead come up with a down payment of $20,000, you can take out a lower mortgage of $180,000.
Scott Nazareth, chief executive officer and founder of Toronto mortgage lender Loanerr, says that a lower mortgage amount translates to a lower monthly payment. It also reduces the amount of interest you pay during the life of your loan.
Of course, this assumes that you have enough savings to afford a larger down payment, a luxury many don’t have. But if you do? Don’t feel bad about dipping into your savings to reduce the amount of money you’ll be sending to your mortgage lender every month.
When It’ll Keep You from Pulling Funds Out of Your 401(k) Account
Scott Johnson, an agent with Marindependent Insurance Services in San Rafael, California, says that it’s almost always better to withdraw money from a savings account to pay for emergencies than it is to take those same dollars out of your 401(k) or other retirement accounts.
Pulling money from your retirement will hurt you in the future, when you need as many retirement dollars as possible to ensure a good quality of life after you leave the working world. It can also hurt you in the present, depending on your age, as you can face both a tax hit and possible penalties.
For instance, if you withdraw from your 401(k) before you turn age 59.5, those dollars will be taxed as ordinary income and be subject to a federal tax penalty of 10%.
“As a general rule, I think it makes sense to use short-term and mid-term savings before even considering tapping into a 401(k) account,” Johnson says.
When You Have a Plan
Eric Roberge, a certified financial planner and founder of Boston financial planning company Beyond Your Hammock says the best time to withdraw money from your savings account is when you have a plan on how to use it.
For instance, you might decide that you’ll buy a home if your local housing market goes through a downturn and prices fall. Or maybe you decide you’ll buy into an S&P 500 index fund if stocks drop by 10%. You can then tap into your savings to take advantage of these opportunities.
Of course, creating such a plan does take thought and a commitment to saving enough money. “You need to be proactive,” Roberge says.
The best way to do this, though, is to set aside enough money each week or month so that you won’t have to drain all your savings when this opportunity arises. Roberge’s advice is to set up a savings account set aside specifically for economic opportunities (in addition to one set up as an emergency fund) and create an automatic contribution to it. How much you put in depends on your financial situation and the opportunity you’re saving for.
“This will provide you with a source of savings that you can freely use any time opportunities to leverage cash come up, without putting you in a position of having to choose between an opportunity and savings that are supposed to be for emergencies or a different specific goal,” Roberge says.
Have you ever had to withdraw a significant amount of funds from your savings to cover an unexpected expense? What was your plan and how did you do it? Let us know in the comments below.
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