If you're in that majority and are looking for some extra motivation to save, here are six surprising ways an emergency fund can benefit you:
1. Ensure the security of your future (retired) self
One of the lesser-known benefits of having an emergency fund is that it can help protect your retirement savings by preventing you from borrowing from your future self.
The Prudential study found that an average of 1.5% of total assets in 401(k)/IRA accounts “leaked" out each year (due to early withdrawals) – but this small percentage of lost assets added up to 25% less wealth in retirement. So that means if you have to withdraw $5,000 from your retirement savings this year to fix your leaky roof, it might result in more than $83,000 that you won't have in the future when you want to retire. Taking an emergency loan from your retirement account is too costly and risky – even a small amount of money today might jeopardize your long-term retirement plans.
If you have no other choice but to take an early withdrawal from your retirement plan, there are smart ways to lessen the blow to your long-term retirement savings. Such as protecting your pre-tax and Roth after-tax contributions to preserve your tax-advantaged savings sources. To do this, consider making incremental after-tax (non-Roth) contributions into your plan, thereby building up a source of savings that is accessible in case of emergency.
2. Be more successful and smile more
According to the Prudential survey, 30% of employees report that issues with their personal finances have been a distraction at work. Having an emergency fund helps you focus on your job instead of stress about paying your bills. Ironically, if you're not worrying about money all the time, you have more energy to concentrate on making more money! Saving for an emergency fund is an investment in your own productivity and career success. See if your employer offers any programs aimed at helping workers establish an emergency fund.
3. Protect your credit, save your sanity
If you already have a few months' worth of emergency savings in the bank, you don't have to put that home repair or car insurance deductible on your credit card. This can help you avoid the stress of maxing out your credit card or other lines of credit, or taking on high-interest debt such as a payday loan. The Prudential study found that 12 million Americans take out payday loans each year, accruing $9 billion in loan fees. High-interest debt can be a cancer on your finances; if you're not able to pay down the balance each month, it tends to get bigger as time goes by. This leads to a cascade of other money woes, such as late fees and hits to your credit score. Plus, being in debt can cause people to lose sleep, experience anxiety, and can undercut performance at work, as in #2. It's best to stay out of high-interest debt in the first place by "loaning yourself" money from your emergency fund.