Be Careful About Treating Your 401(k) Plan Like a Savings Account

As the economy struggles and we approach the holidays, many people turn to their 401(k) or other retirement plans for some quick cash. If your retirement plan has a loan provision, you may be tempted to borrow what you need since you'll just be paying yourself back. While that is true, even though you do pay yourself back over time, you may end up doing more harm than good.

The biggest mistake that many people make is that when they borrow money from their retirement plan, because they have to repay it slowly through payroll deduction, they will usually also stop their regular contributions. Now, not only have you taken money out of your account so that it misses out earning interest or gaining value, but now you're just using the next few years to pay yourself back with after-tax money. This means that after a few years go by, you're in worse shape than if you had left the money alone to continue to accumulate. This can be even worse in today's market when we've seen significant drops in stock prices over the past year. You would be taking money out of your account when stocks are at record lows, and likely end up getting back in when markets are higher.

Resist the urge to borrow money from your 401k if you can. While it can be used as a last resort in an emergency, you shouldn't get into the habit of tapping into it whenever you need a little extra cash. You should have an emergency fund set aside to cover short-term money needs, and one of the best ways to get started is by creating an automatic savings plan. Just like how you make small and regular contributions into your 401k, small and regular contributions into a savings account will add up and provide the piece of mind that you have money available if you really need it.