The coronavirus pandemic has swept the nation and wreaked havoc on the economy, and many workers are concerned not only for their health, but also their finances.
In fact, while only 63% of Americans are concerned about getting sick from the virus, according to a recent survey from FinanceBuzz, 68% are worried about how they're going to pay their bills, and 79% are distressed by the thought of unexpected expenses popping up right now.
Although saving for retirement is critical (even during market downturns), there is one scenario where it may be wiser to press pause on retirement saving to focus your financial efforts elsewhere.
When it's time to take a break from retirement saving
As more states announce "shelter in place" mandates and businesses temporarily close their doors, many employees are suddenly finding themselves without income. If money is tight right now, it's especially vital to prioritize your spending.
While it's important to save for retirement, that extra money in your retirement account may not do you much good if you can't afford to pay your bills. In addition, unexpected expenses could be a major threat if you're temporarily out of a job. If you're not prepared for them, they could devastate your finances.
For these reasons, it might be a good idea to prioritize building an emergency fund over saving for retirement -- at least for right now. If you were to continue saving for retirement even when you have no emergency savings, you could be forced to withdraw money from your retirement fund or take on expensive debt if you run out of cash. An emergency fund can give you peace of mind, since you'll know you can pay the bills for a few months even if you lose your source of income, especially since nobody knows exactly how long it will be until life is back to normal.
Keep in mind, however, that pressing pause on your retirement savings should only be temporary. If you hold off on saving for too long, it will be more challenging to catch up later. But if you have limited cash to spare and currently don't have any money set aside for emergencies, it's wise to focus on building a healthy rainy day fund now.
Establishing an emergency fund when money is tight
Ideally, you should build an emergency fund before an emergency pops up. But what should you do if we're already in the middle of an emergency and you don't have any savings? The good news is that even if you're strapped for cash, there are a few moves you can make to save more.
First, divert any money you were stashing in your retirement fund toward your emergency fund. Next, create a thorough budget and start tracking every single expense. When you know where all your money is going each month, it's easier to see if there are areas where you're overspending. You may discover you're already spending less now than you were a few weeks ago, since you're likely no longer going out to dinner, grabbing drinks after work, or commuting to and from the office. But you might still be able to find places in your budget to cut back. Every dollar counts, so no cutback is too small.
Once you have a good idea of what you're spending each month and have made all the cuts you can, stash your extra cash in a high-yield savings account. Traditional bank savings accounts typically offer interest rates of just a fraction of a percent per year, while many high-yield savings accounts boast interest rates of nearly 2% per year. In addition, by parking your money in a high-yield savings account, your cash is protected against market downturns and you can withdraw it at any time without facing penalties.
It's impossible to say exactly what the future looks like, and that can be frightening. But instead of panicking, come up with a game plan for how you'll handle this unexpected obstacle. By (temporarily) pressing pause on saving for retirement and reallocating that cash toward your emergency fund, you can ensure you're as prepared as possible for whatever lies in the future.