Even though the recession has receded and US unemployment figures have returned to pre-crisis levels, there is a legacy that is still being felt. Even those that had paid great attention to proper money management and planned scrupulously could not necessarily avoid the implications of what was going on around them. The result has challenging for many; how to avoid financial meltdown when unemployment interrupted the regular monthly income needed to pay bills.
Hit the Retirement Fund?
It appears that as many as 30 million Americans opted to access their retirement savings as the solution to meet debt. Such a strategy has implications for the future. In an ideal world people should start planning then saving for retirement in the early stages of their career even if they still have four decades before that retirement date arrives. At the same time it makes sense to build up an emergency fund that can be used to meet unexpected events. Clearly there are many Americans that do not have such a fund and statistics show that credit card debt in not insignificant.
A recent survey on bankrate.com suggests that over 25% of workers over the age of 50 believe their financial circumstances have worsened recently and a significant number of them have taken money from their retirement provision to meet an emergency even though there are tax implications in doing so. This highlights the problem of insufficient retirement provision and it becomes even more critical for the age group surveyed because it is the one where retirement is relatively imminent.
One of the other consequences of the recession has been that a significant number of Americans no longer have much faith in the traditional financial institutions that they blame for the Collateralized Debt Obligation Crisis that precipitated the recession. A survey by Allianz Insurance suggests that feeling is widespread and in addition they regard the markets as too great a risk. The damage to the real estate market has also hit those people who had planned to use the asset they have accumulated to help fund their later years. There is growth once again but that was certainly interrupted for the years of the recession.
There is a penalty for taking money from a retirement fund. Surely it is so much better to have an alternative strategy and for those in regular employment there are alternatives to causing potential damage to retirement years?
The first thing to do is to prepare a proper budget to include all monthly expenditure and identify problem areas with a view to saving money for both an emergency fund and retirement. While employment prospects should now be fairly good ideally everyone should have an emergency fund equal to at least three months living expenses and debt liability.
The process of creating that is dependent on getting rid of debt that is either unmanageable or expensive and statistics show that the level of credit card debt countrywide is disturbingly high. Credit card balances incur high interest and should be the first thing to target. A personal loan, even for those with a poor credit score is much cheaper and an obvious way to start the process of reducing monthly expenditure.
While some traditional lenders have become very conservative when looking at loan applications, good online lenders tend to prioritize affordability of applications from individuals rather than their credit history. As long as a loan is used to consolidate and pay off existing expensive debt the result will be that expenditure falls and potentially creates a figure that can go into savings.
It seems strange that so many people are looking at raiding their retirement fund when there is a much more cost effective way of accessing funds. While it may still take a while to build up an emergency fund of significance it is a process that everyone should include in their financial strategy while saving for retirement at the same time. Those over 50 years of age have a fairly limited time in which to do the latter. It is time for everyone to think about their financial situation and take appropriate steps where their position looks fragile. There are alternatives but paying off debt should top the list of priorities, even if it means taking out a less expensive form of debt as a tactic.