STOP Cashing Out Your 401k!

An attractive financial move with inevitable long-term consequences

AI: burning money

Shockingly, 41.4% of employees cashed out 401(k) savings on the way out the door (Harvard Business Review)

I made a big mistake and used some of my investment to purchase my first car. Looking back, I should've kept that money in there—a mistake I never made again. To date, I have never withdrawn investments. Not only is withdrawing my investments not a temptation, but I treat them as if they don’t exist because I understand the potential value of untouched investments (see Warren Buffet’s quote below).

When a friend lost their job, they panicked because they had no savings. Then they suddenly remembered they had money stashed in their 401k, something I urged them to take advantage of through their employer. Unfortunately, they withdrew the money, mitigating the value of their 401k to $0.

Short-term thinking will screw your financial gains every single time. Investing is a long-term game. “Buy and hold” as Warren Buffet famously states.

Your investments are the last resource you should ever use in a financial emergency, and here's why:

When you use your savings and investments, you force yourself to start over from the beginning. You lower your bottom line and net worth, and compound interest works less hard for you because the balance of your investments is lower.

Your 401k is for retirement or future endeavors, not for right now, but your emergency fund is definitely for right now, which we will discuss after the next section.

Why Many Dip Into Their 401k

People withdraw from their 401ks due to a lack of proper planning. Most people assume financial inconveniences won't occur or that they're Gucci for the time being and don't need to plan. Hence, many people can't afford to cover a $500–$1000 emergency expense because saving is never a priority for them.

It's easy to focus on getting by, but that "right now" (short-term) thinking only leads you to never accumulating wealth.

People who frequently cash out their 401k never grant themselves the opportunity to build wealth. They invest yet withdraw at the same rate, so they cancel their efforts, which wastes their time.

Set up your emergency fund to avoid withdrawing from your emergency fund when you’re in a financial bind.

Why You Should Adopt The Emergency Fund

The first emergency fund I set up was $1,000 per Dave Ramsay's advice. That was plenty back in high school, and I never needed it, which is why it was so easy to maintain that balance.

As my expenses increased along with my income, I quickly realized that Dave Ramsay's proposed 3–6 month emergency fund and the $1,000 savings were insufficient.

If a person were ever to take an extended break from work or lose their job, they'd only have 3–6 months to find a job or less if they only have $1,000 saved up, which can quickly disappear. Tack on children, spouse, additional family members, and other financial obligations, and you’re setting yourself up for a financial bind: aka, you’re screwed.

Why You Should Adopt The 2 Year Emergency Fund

The two-year emergency fund makes you financially bulletproof. You can sip your tea and chill for two years, but you'll also have peace of mind and plenty of time to strategize, and you won't have to cancel your 401k efforts.

I love the two-year emergency fund because it keeps your financial stress levels at a minimum and helps you avoid making desperate moves such as taking the wrong job or cashing out your accumulated investments.

To avoid having to cash out your 401k, build up your emergency fund, plan, keep your expenses low, and stay committed to your long-term investment strategy.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.