Don't Treat Your 401k Like a Savings Account

The holidays can be a time where money becomes tight, and 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 for the holidays since you'll just be paying yourself back. While that is true, even though you do pay yourself back over time, you 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 growth, but now you're only using the next few years to build your account up to where it was instead of allowing it to continue building.

Resist the urge to borrow money from your 401(k) 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 401(k) each pay check, small and regular contributions into a savings account will add up and provide a piece of mind knowing that you have some money available if you need it.