I like to solve crossword puzzles and, on January 11th, when I was doing the Universal Crossword in the newspaper, clue 4 down was “Rainy Day Fund”. I looked at the number of squares allotted for the answer and was surprised that there were not enough of them for “Emergency Fund”. After solving enough other clues to give me some of the letters they were looking for in 4 down, it appeared that the puzzle creator was looking for the answer, “Nest Egg”. NO, NO, NO – a nest egg is not a rainy day fund!
A nest egg is money you are setting aside for a future goal; a goal such as retirement. Your Thrift Savings Plan account is a nest egg. Your Individual Retirement Arrangement(s) are nest eggs. Hopefully, you wouldn’t think of raiding your TSP or IRA if a rainy day appeared. Yes, you can take hardship withdrawals or loans from your TSP in case of emergencies, though the Thrift Board discourages them. Hardship withdrawals also come with a 10% early withdrawal penalty if you are under 59 ½ when you take one. Yes, you can take early withdrawals from IRAs, but you will be subject to the same 10% early withdrawal penalty.
You should have an emergency fund (rainy day fund) big enough to cover at least three months of expenses. Those whose employment is less secure than that of us federal employees should have a fund that covers a longer period of time. During the government shutdown that ran from December 22, 2018, through January 25, 2019, there was a spike in hardship withdrawals from the TSP. This should not have been the case. Federal employees should not be so financially fragile that a one month furlough (for which they were almost certainly going to be paid) causes them to raid their nest egg. They should have had an emergency (rainy day) fund from which they could have withdrawn money to tied them over and then replaced that money once they were paid for the furlough time.
Saving for retirement is important, as is saving for your children’s education and saving to purchase a home. But, until you have set enough aside for an emergency fund, you should have a line item in your budget for emergencies.
Please don’t be like the creator of the crossword puzzle who confused a nest egg with a rainy day fund. Understand the difference and prepare for both rainy days and your future retirement.
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