Don’t Let Financial Disruptions Derail Your Plans
Organizing savings to minimize the impact of unexpected events.
Savings is the money you use to cover unexpected expenses, but what happens when emergencies outstrip your emergency fund? Unfortunately for most Americans, that means dipping into the money you have allocated for retirement.
A new study from TD Ameritrade finds these emergencies (referred to as “financial disruptions”) are costing Americans a whopping $2.5 trillion in lost long-term and retirement savings. As a result, almost half (49%) of these “Disputed Americans” will have to delay or forego retirement.
The study details some key statistics about financial disruptions:
- 50% of “Disrupted Americans” are forced to withdraw from savings or borrow fund during an emergency
- When a disruption occurs, 79% of “Disrupted Americans” reduced their retirement contributions – by $300/month, on average
- Statistically, the average “Disrupted American” family took four years and eight months to reestablish their retirement contributions after experiencing a challenge.
- The most common type of disruption is unemployment or employment-related income reduction.
“It’s unfortunate that Americans are being forced to hurt their own retirement plans in order to overcome challenges caused by these kinds of disruptions,” says Gary Herman, President of Consolidated Credit. “It’s a sign that while the average American family may be taking steps to save more, they may not have achieved the right balance in their saving strategy.”
Essentially, an effective saving strategy needs to allow you to plan and overcome challenges in the short, mid and long-term. If all of the money you put into savings goes directly into a retirement account, then you may find yourself stuck if you have an expensive home repair, car accident or medical emergency.
Helpful tips to maximize your savings
Instead of putting all of your financial eggs into your retirement nest, you need to spread savings out so you can strategically plan for the road ahead.
The following tips can help you cover financial disruptions without risking your retirement plans:
- Maintain an emergency cash fund of $1,000 to cover short-term disruptions like car and home repairs.
- Save up at least 3-6 months of budgeted expenses as a financial safety net so you can cover bills, groceries, gas and other essentials even if you lose your job and don’t have any income coming in.
- In a weak economy when unemployment is high, you may want to increase your financial safety next to cover up to 12 months of budgeted expenses, since longer periods of unemployment are more likely.
All of the above savings should be separate from your retirement savings. In addition, you should never just focus on one type of savings and leave the others lapse. So, for example, let’s say you’re savings contributions are at the average of $500/month that most Americans hit when things are good and stable.
To achieve real stability, that amount should be divided amongst your savings needs. So if you’re just getting started and don’t even have an emergency cash fund, you may put $200 towards retirement, while putting the rest towards your short-term savings. Once you have the emergency cash fund set, you move on to building a strong financial safety net.
Then, once you have enough saved to cover you even if you don’t or can’t work for a few months, then you can decide how your savings should be allocated. Even so, you may not wish to put all of the $500 towards retirement. That’s because the TD Ameritrade report points out financial disruptions can include things like a mortgage down payment.
With that in mind, once you have your safety net your short-term and mid-term savings can be earmarked for major purchases like the down payment on your next home or car. This way, you won’t have to dip into your retirement assets or decrease your monthly retirement contributions in order to generate the cash to make your purchase.
For more information on developing the right plan and balancing your saving strategy, Consolidated Credit offers the following resources:
- A Step-by-Step Guide to Saving
- How to Structure Savings for Short-Term and Long-Term Goals
- Simple Savings Calculator
- Infographic: Maintaining a Health Savings Mix
If you’re having trouble developing an effective saving strategy because high debt payments are eating up every paycheck, we can help. Call Consolidated Credit today at to get help with your debt so you can achieve the stability you need.