401(k) Hardship Withdrawals Are at a Record High. 3 Steps to Gain Control of Your Finances

Inflation has strained many Americans' finances over the past few years, and the damage is still being felt.

According to the latest data from Vanguard, 3.6% of Americans took hardship withdrawals from their 401(k) plans last year. A hardship withdrawal can vary from taking money out of a 401(k) to cover medical bills or to avoid foreclosure. While the percentage of hardship withdrawals may not seem high, it's up from 2% before the pandemic and has reached a record high.

If you combine this data with the fact that America's total credit card debt is surging and is now above $1.13 trillion, it's clear that many households are struggling. If you find yourself playing catch-up with your finances, here are a few suggestions to get back on track.

1. Start with building an emergency fund

It might seem impossible to put any money into an emergency fund if you're trying to get your finances under control. But if you don't slowly build up a small cash reserve, you're bound to reach for a credit card to help cover unexpected expenses.

Most experts recommend first building up your emergency fund to $1,000 so you can offset the cost of a car repair, broken appliance, or minor home repair. It's best to set up a separate account for this instead of leaving the emergency fund money in your checking account.

To help reach that goal, look through the last three months of your expenses and try to find a handful of items you can cut out. It could be eating dinners out, one or two subscription services, or finding a cheaper smartphone plan.

Whichever expenses you cut out, automate a deposit for that amount from your checking account to a high-yield savings account to begin building up your emergency savings. After you've saved $1,000, aim to save enough for three months of expenses. That provides a solid cushion in case of a job layoff or another major life surprise.

2. Focus on low-balance debts first

Aiming high when you're trying to pay off debt can be tempting. But the larger debts will take longer to pay off, and many people quickly lose motivation.

It's often recommended to focus your attention on your smallest balances first. I used this strategy when paying off my car loan and eliminating my credit card debt. Seeing your balance continually get smaller month over month is satisfying.

This method is called the debt snowball. You order your debt from smallest to largest. Once you've paid off the smallest amount, you use the money you were previously spending on that debt to pay off the next largest amount.

For example, if you have a credit card with a $2,000 balance, a car loan with a $7,000 balance, and another credit card with a $10,000 balance, you would first tackle the $2,000 card balance. Once you pay that off, you then use the same monthly amount you were spending on the smaller balance and put it toward the $7,000 amount. Once that debt is gone, you move on to your next largest debt.

3. Work with a financial advisor

Knowing what to do with your money can be overwhelming. That's why many people turn to a financial advisor to help steer them in the right direction.

A good financial advisor can help you create a monthly budget, devise a debt payoff strategy, and even teach you investing basics. The good news is that financial advisors aren't just for wealthy people; anyone can use them to create a financial roadmap.

A good place to begin is with the National Association of Personal Financial Planners (NAPFA). These advisors work on a fee-only structure and are fiduciaries, which means they're legally bound to work in the interest of their clients above their own interests. You can search for financial advisors on the NAPFA website.

Speaking with an advisor who has your best interests in mind can be an excellent first step toward getting your finances under control. And having an experienced professional in your corner encouraging you to keep going with your financial goals can help you stay motivated.

Tackling debt and building an emergency fund can seem like insurmountable obstacles. But starting with a small savings goal and then moving toward paying off small debt amounts first will help you stay focused. And speaking with a financial advisor will help take your financial planning to the next level.