Paying for Childcare and Receiving Childcare Assistance — What to Know

There’s no other way around it, having a child is expensive. It’s a joyous expense but a hefty one all the same. From formula to diapers and the pressure to save for college, you need a sound financial plan and a whole lot of love when you become a parent. And, unless you work from home and can juggle parenting simultaneously, it’s likely that you’ll also need a strategy for paying for childcare.

The Cost of Childcare

Costs vary based on location and your specific economic situation, and the math hasn’t been recalculated for a few years now, but the last time the U.S. government put an estimate on raising a child to age 17, the tally came to a staggering $233,610. It has undoubtedly only gotten more expensive. This means that paying for childcare and other non-college education costs accounts for over $37,000 on average, from birth to their 17th birthday. 

How much is that? Well, The Balance points out the staggering fact that in 33 states as well as the District of Columbia, the cost of infant care is more than the cost of in-state tuition at a public, four-year college!

With an average cost of childcare ranging between $4,000 to $22,600 annually, according to the Economic Policy Institute (EPI), paying for childcare is one of the most significant financial challenges working parents face. But there are programs that help pay for childcare, as well as personal financial strategies that could save you money on childcare costs.

5 Strategies for Paying for Childcare

Whether you’re expecting your first baby, recently became a new parent or have a full family already, you could benefit from a solid financial strategy for paying for childcare. Here are five tips to help you find money to pay for childcare — and to spend less of it while doing so.

1. Evaluate Your Budget

Most financial strategies and goals start with an evaluation of your monthly budget. Take a close look at where your money goes and where you might tighten up. Most people spend unnecessary money every month (too much takeout, unwatched streaming services, bloated cable packages, excessive heat/air-conditioning usage, etc). Those dollars could be better allocated and put to use elsewhere (toward long-term financial goals and childcare costs, for example).

2. Part-Time Childcare

Even if you’re working remotely, you may benefit from receiving childcare assistance. Enrolling your kids into childcare on a part-time basis will help keep your costs down while still affording you the time to get your work done, indulge your individual passions, clean, or simply practice the self-care needed to be a whole and healthy person and parent.

3. In-Home Assistance

Babysitting has been normalized for parents to enjoy a night out, but why not make use of the same dependable neighborhood teenagers and babysitters you have had on speed dial to help you with your childcare during the daytime. You’ll get the on-demand childcare assistance you need for a fraction of the cost of full-time childcare. 

4. Low-Cost Childcare

Paying for childcare at private preschools can give parents sticker shock. Instead, look into the churches, YMCA/YWCA and other non-profit community-based organizations in your town. These local establishments may offer a low-cost childcare option for neighborhood families.

5. Free Pre-K

As parents await the establishment of free universal pre-k, there are some options for giving your child the preschool education and socialization they need. Check out the pre-kindergarten choices in your state to discover your options for receiving free state-sponsored childcare assistance and early preschool education for your kids.

5 Ways to Receive Childcare Assistance

From tax-advantaged savings accounts and tax credits to prominent government programs, here are five ways to receive financial assistance to help pay for childcare. 

1. Dependent Care FSA

If your employer offers a Dependent Care Flexible Spending Account (DCFSA), you can set aside up to $5,000 tax-free to pay for childcare. This includes preschool, summer day camp, before or after school programs, and daycare. Depending on your tax rate, says that using this kind of FSA to pay for childcare could save you up to $2,000 a year. 

2. The Child and Dependent Tax Credit

Even if your employer doesn’t offer a DCFSA, you may still be able to take advantage of tax benefits. This specific childcare tax credit allows you to itemize up to $3,000 in childcare expenses per child per year, up to a $6,000 annual cap per family. goes on to explain that, “Once you’ve itemized the expenses, you can take a percentage of that and apply the tax credit. Most families will see a 20% savings, which means you’ll save up to $600 if you have one child and up to $1,200 if you have two or more children.”

3. Military Childcare Fee Assistance

If you’re a member of the United States military, you may be eligible for Department of Defense childcare fee assistance to help you pay for childcare. The requirements for this program are different for each branch of service, so check to see what your branch of the military offers.

4. Childcare Subsidies

The federal government distributes money to state-run childcare subsidy programs to help low-income families pay for childcare so they can work or go to school. Check the benefits and subsidies available in your state to see how they may help you pay for childcare.

5. Head Start Programs

Head Start and Early Head Start programs exist to provide low-income families free learning and development services for children ages birth to five. If you have a child with disabilities, Head Start could be a good option for helping to prepare them to succeed in school and in life, and helping you get the childcare assistance your family needs.

Read more: 6 Lessons for Teaching Financial Literacy to Your Child

Disclaimer: None of the information provided in this email or blogs is intended to be tax advice. Please consult an attorney or tax advisor.

The 9 Best Ways to Use Your Stimulus Check

Now that the $1.9 trillion American Rescue Plan has been signed, money from the third round of COVID-19 stimulus checks is arriving in millions of bank accounts. In this post we’ll look at how you might consider using your stimulus check. But first, let’s answer the one question you may be asking about the new economic relief package.

Do You Have to Pay Back the Stimulus Check?

As with the previous two rounds of COVID-19 stimulus checks, you do not have to pay back this money. These funds are not a loan or an advance on future tax refunds. This is stimulus money to help you with your financial needs and hopefully invigorate the economy. Additionally, this new stimulus check is not taxable, so there will be no unpleasant surprises caused by these funds when you file your taxes in 2022. Of course, it’s always best to consult with a tax professional about the impact of the economic stimulus checks on your specific tax situation.

The 9 Best Ways to Use the New Stimulus Check

If used wisely, money from the latest economic stimulus might help you accomplish a number of goals, both immediate and longer term. This is especially true if you’re no longer in dire straits by the time the new COVID-19 stimulus check arrives in your checking account.

With this extra money, up to $1,400 for individuals based on income levels from your most recent tax filing, you might add to or start a savings account and take care of yourself and loved ones who have been through a difficult 12 months. You could also consider using some of your stimulus check to pay down debt, shop at local small businesses and make a positive impact on your community’s most vulnerable residents. If managed correctly, you could accomplish all of the above and more with your COVID-19 stimulus money.

1. Use Your Stimulus to Stay Afloat

It’s possible that you’re still behind on important bills because of the pandemic that prompted this third round of economic stimulus checks. Maybe rent is overdue or a utility bill needs to be paid. There’s no shame in this — the past 12 months have challenged nearly everyone in one way or another — but you will now have up to $1,400 to square what you owe and plan for the future.

2. Pay Off Debt with Your COVID-19 Stimulus Checks

If you have an outstanding balance on a credit card charging you a high rate of interest, a payday loan or other bills weighing you down month to month, using your stimulus money to pay them down could be the best use of your portion of the American Rescue Plan. 

Pay down the balance of your highest interest debt first. If you can pay it off in full, that’s even better. But if not, consider a debt consolidation loan at a lower interest rate. Once paid off, consider closing your high-interest credit card in favor of one with a more favorable interest rate and no annual fee.

3. Put Your Stimulus Check Toward Creating an Emergency Fund

Most Americans were taught a valuable financial lesson in 2020: It’s crucial to have money set aside in an emergency fund. A ‘rainy day’ savings account can help you and your family in the event of unexpected financial struggles, a job change or, as we’ve seen, a global pandemic. As you decide how to use your stimulus check, be mindful that the longer you wait to transfer the money from your checking account to your savings, the more likely you are to dip into it.

4. Take Care of Your Mental Health

If you’ve been needing or wanting to try therapy but couldn’t afford it because therapy is not covered by your health insurance, put your stimulus to work to improve your mental health. You can schedule an appointment with a therapist in person or schedule a virtual service to stay socially distant while seeking the help you deserve. 

5. Schedule Your Overdue Car Repairs

If you’ve been ignoring that pesky check engine light, putting off overdue oil changes or delaying other critical automotive work, think about using a portion of your stimulus money on repairing your ride. Scheduling the repairs your car has needed during the pandemic might end up saving you a lot of money down the road.

6. Put Your Stimulus Check to Work in Your Community

Understandably, philanthropy and charitable giving has dipped as Americans who would usually be generous with their disposable income have found themselves struggling to make ends meet and suffering through furloughs. With this new batch of COVID-19 stimulus checks, you may be in a better position to make a big difference.

There’s probably a cause or two near and dear to your heart, maybe even near you in your local area. And chances are, they could use some support right now. So, whether that’s buying canned goods for a local food bank or donating cash to the animal shelter you once adopted your pet from, using a bit of your stimulus check to do good will make you feel better today and may just help you during next tax season too (because most charitable giving is tax deductible).

7. Invest in Yourself

Thinking long term, one of the smartest ways to use a stimulus check could be investing in yourself through a degree program or going to school to gain a new skill. Additionally, making this investment in your future may have future tax benefits, too, through the Lifetime Learning Credit. 

According to the IRS, “the Lifetime Learning Credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills.” This credit is worth up to $2,000 per tax return and there’s no limit on the number of years you can claim it.

8. Start a Business

As you’ve been home during COVID, did you start a new hobby or find yourself crafting to pass the time? Maybe those new passions could become a viable side hustle or even full-time job now. Not only did 2020 see the largest increase in new business applications in 13 years; it also saw a 61.7% increase in the number of Etsy sellers from the year prior. 

Your COVID-19 stimulus could be the seed money you require to launch a business on Etsy or invest in equipment to record a podcast, monetize it and take it to the next level.

9. Treat Yourself with Your Economic Stimulus Money

Buying that beautiful new watch or having lunch in the independent restaurant that pivoted to curbside pickup to stay in business during the past year may seem frivolous but doing so will actually accomplish two crucial things. 

First, self-care is important. You may feel lighter and happier, and after what we’ve all been through, that’s a valid desire. 

Second, you will be putting stimulus money into the local economy, which will help businesses, keep people employed and maybe someday soon encourage hiring, and give America the boost lawmakers are hoping for with the new round of economic stimulus checks. 

Read more: 11 Ideas for What to Do with Your Tax Refund this Year

5 Clever Ways to Boost Your Personal Loan Approval Chances

There may come a time when you need to borrow money. Whether it’s in a few months or a few years, boosting your personal loan approval chances now may pay dividends later. 

Maybe you’ll be buying a car, consolidating credit card debt, or making home improvements. Whatever your goal, personal loan approval could be the key to it all, but that’s not the first step in the process of borrowing money. By taking action today, you can increase your chances of being approved for a personal loan tomorrow.

1. Know Your Credit Score

The first step to improving your chances for personal loan approval is knowing your credit score and, if necessary, working to repair your credit. Put simply, your credit score is a three-digit number that summarizes your entire credit history. Lenders use it as a way to determine your creditworthiness and default risk. The better your credit score when applying for a loan, the more likely you’ll receive a personal loan approval and, possibly, the best interest rates available. Here are 6 tips for improving your credit score

2. Pay Off Debt

Having less revolving debt (such as credit cards or any debt with fluctuating balances and payment amounts) may increase your chances of a personal loan approval. If you can, consider paying down, or even paying off, some of your debt before applying for a personal loan. However, be aware that paying off all your debt may not be an advantage for improving your credit.

3. Close Credit Cards Strategically

Your credit score will look at both credit utilization rate (the total amount of outstanding credit card debt you have in relation to your total available credit limit) and the length of your credit history. However, smartly closing credit cards is trickier than it might appear. 

You may want to consider: 

Closing the right credit cards may clean up your credit profile without negatively impacting your credit score, which can increase your chances of receiving a personal loan approval.

4. Increase Your Income

Debt-to-income ratio is one of the factors lenders will look at before approving your personal loan. If you’re using a high percentage of your income to pay off your debt every month, you may be able to increase your personal loan approval odds by taking on a part-time job to boost your income and lower your debt-to-income ratio.

5. Line Up a Joint Applicant

Even if you take all the steps above, obtaining personal loan approval may still be challenging. In this scenario, consider lining up a joint applicant. When you apply with a joint applicant, lenders consider both of your incomes and credit histories when deciding whether to approve your application. You could also look at getting a co-signer to improve your chances of receiving personal loan approval. Your co-signer will be required to step in and make the payments should you default on the loan, so they should be a trusted person who has a good credit history and strong money management skills.

Find out how Prosper can help you apply for an online personal loan today.

Read more: How a Personal Loan Can Help During a Recession

All personal loans made by WebBank, Member FDIC.

How to Evaluate Your Financial Health in 5 Steps

Financial health doesn’t need to be an abstract concept. And, if you ask us, it shouldn’t be. Like taking care of your body and mind, financial well-being isn’t exclusively for the rich. It’s true, you can check up on your financial health and take steps to improve it starting today.

Why Is It Important to Evaluate Your Financial Health?

Simply put, you can’t fix what you don’t know is broken. Maybe you feel a little, or even a lot, uneasy about your finances. Or maybe you don’t even realize the true state of your money. Until you write it down, map it out and see the entire picture, you likely won’t be able to chart a navigable course to calmer waters. By spending time on your finances today, you can sort out debt, tackle savings, and improve your financial well-being for tomorrow.

5 Steps to Evaluate your Financial Health

Now that you understand the importance of evaluating your financial health, let’s talk about what that actually means and how to do it. Here are 5 steps to evaluate, and eventually improve, your financial life:

Step 1: Assess Your Net Worth (or How Much Money You Actually Have)

Calculating your net worth is the first place to start when sorting your finances. The term net worth may sound like something only business tycoons and celebrities think about but, every single person has a financial net worth. Do you own a home or cars? Do you have a 401(k) or pension plan? Let’s calculate your net worth! Here’s how:

  1. Write down the value of every large thing you own. This can include cars, cash in checking and savings accounts, investments like retirement accounts, the current value of your home or other real estate holdings. It can even include that vintage baseball card collection in your basement. (Don’t include your income as an asset. We’ll talk about income later.)
  2. Now do the same thing with your debt. Debt can be credit card balances, medical bills, the amount you owe on your mortgage, outstanding home equity lines of credit, auto loans and student loans.
  3. Finally, subtract the total debt from the total assets. This number is your net worth.

Don’t panic if your net worth is a negative figure. Remember, this is step one of your very first financial health evaluation. Things can and will improve from here. This step alone puts you on a clear path to financial well-being.

Note: If you’re paying your mortgage on time, you’re already on the right path. Each payments means you own more of your home and, therefore, increases your net worth. The same goes for every time you pay down or pay off a credit card. 

Step 2: Calculate Your Debt-to-Income Ratio

Don’t worry, this one requires more simple math. Your debt-to-income ratio is how your monthly debt obligations, like a mortgage or rent plus car payments and loan or credit card payments, compare to your monthly income.

If you already have a monthly budget, the numbers needed for this calculation are likely at your fingertips. List out each of your monthly debts on a separate line. Here are some of the more common monthly debt payments:

  • Mortgage/rent payment
  • Car payment(s)
  • Student loan payment(s)
  • Medical bill(s)
  • Credit card payment(s)

Add up all those recurring monthly payments and divide by your gross monthly income. Move the decimal two places to the right. This is your debt-to-income ratio.

A debt-to-income ratio is one of the primary factors in calculating your credit score. Most financial experts and lenders recommend a ratio of 30 percent or lower.

If your debt obligations take too much of your current monthly income, you might consider a part-time job or a side hustle to get the ratio into a manageable range. 

Step 3: Set Your Goals

Where do you want to be at the end of next year? How about in 10 years time?

Hockey legend Wayne Gretzky once said, “You miss 100% of the shots you don’t take.” The same is true of setting goals. Whether you want to pay off your credit cards or have your sights set on something bigger, you can’t plan, prepare and work toward these goals until you set them. Write them down or post them on social media. Hold yourself accountable for the future you want to build for yourself and your family.

Step 4: Make or Update Your Budget

If you have a monthly budget, give yourself 10 points and a pat on the back because you’re already one step ahead of 65% of Americans, who couldn’t tell you what they spent last month!

Even those with a budget could benefit from updating their spreadsheet more often. To really stay on top of your finances, spend 5 minutes every day logging into your bank account(s) and credit card sites, and update balances on your budget. It might seem obsessive, but this simple daily routine can save you a lot of financial stress.  It’s important to know where you stand, what’s coming and going from your accounts, and what your credit card bills will be next month.

Another positive of having a budget and updating it regularly is seeing in real time where your money is going, so you can answer important financial questions like: 

  • Do I spend too much on eating out or ordering in?
  • Can I afford my car or should I trade it in for a different one with a lower payment?
  • Should I consolidate my debt into a single payment with a lower interest rate?

Once you answer these questions, you’ll be able to think clearly about whether your spending aligns with your goals and current income level. Then, you can make any necessary adjustments.

Step 5: Save for the Future

By the time you’ve gotten to this point in your financial health evaluation, you may think that you can’t worry too much about the future, that you don’t have the money to get through this month, let alone 10 or 20 years from now. But if you truly want to achieve financial well-being and hit your goals, thinking and planning for tomorrow is critical. Otherwise, you may be on the financial hamster wheel forever. Think about your financial future in two parts:

Later — Your Retirement

Saving for your retirement is the easiest way to improve your long-term financial health. If your employer has a 401(k) or 403(b)(7) retirement plan, consider contributing at least a level or percentage that earns you the full employer match. This money will come out of your paychecks before taxes, reducing your taxable income. And, because that money is taken out prior to you receiving your paycheck, you’ll get used to it not being there.

Now — Your Savings

If you’re living paycheck to paycheck and have a high debt-to-income ratio, the idea of putting money into a savings account might seem counterintuitive. Most don’t think twice about those $5 drive-thru coffees or $10 takeout lunches, though. Try skipping at least one of each of those every week, and instead putting that money into a savings account. Doing so could yield nearly $1,000 in savings every year. That’s a tidy little nest egg to start with, and once you see the impact of those weekly decisions, you may want to shift more money away from unnecessary expenses into building a secure future and improving your financial health. 

Read more: What You Need to Know About Consolidating Your Credit Card Debt

10 Questions to Ask Before Applying for Personal Loans Online

There are several questions you should be asking, of yourself and of potential lenders, before applying for personal loans online. Spending time reflecting on your own financial needs and asking questions about how the loan can be structured may go a long way to ensuring your personal loan fits within your budget.

1. Do I Need This Loan?

This question may seem obvious but it’s vitally important to think critically and honestly about your financial needs before applying for personal loans online. 

2. How Much Money Do I Need?

The amount of the loan will directly impact your loan payment; therefore, you likely will not want to borrow anything more than you absolutely need. Whether you are looking at personal loans online for debt consolidation or home improvement, be sure to double check your math before applying.

3. What Loan Repayment Amount Can I Afford Each Month?

Do you have a monthly budget? You should, because not only will it help you spend wisely week-to-week, and save money for a rainy day, but by looking at your monthly budget you may be able to easily tell how much of a personal loan payment amount you can afford without negatively impacting your quality of life. You don’t want to overextend yourself month-to-month, so take the time to do the math to discover the maximum loan repayment amount you can afford.

4. How Long Do I Have to Repay the Loan?

It’s crucial to understand the loan term options to ensure you’re not only getting a personal loan with a payment you can afford, but also to know how many years that monthly line item will be a part of your budget. Typically, the shorter the term, the higher the monthly payment amount will be, but the lower the amount of the total interest you will be paying. 

5. What’s the Interest Rate?

The interest rate is the proportion of a loan that’s charged as interest to you, the borrower. Interest rates fluctuate due to a variety of factors, including your credit score, length of loan and amount borrowed. Before signing any paperwork, check your personal loan interest rate and ask to see how much of each payment will be going to repay principal and how much is interest. Keep in mind that it’s also important to pay attention to the APR, which represents the real cost of borrowing money, as it includes the interest rate plus other costs such as fees. 

6. Does a Personal Loan Impact My Credit?

Not only does taking out a personal loan impact your credit, but merely applying for personal loans could show up as a hard inquiry in some cases. Too many of those may lower your credit score and be a potential red flag to lenders in the future. Many companies can provide you with a rate without impacting your credit, so check to make sure you know the potential impact before applying. It may also be wise to only apply for a personal loan when you are certain you have the need for the money, know exactly how much money you require, and can afford the payment — all questions you would have already asked and answered before starting the application process.

7. Are There Fees?

Some personal loans online have fees. These may be called an origination fee or closing costs. Ask about any and all potential personal loan fees which could change your proceeds or cost you money upfront to borrow.

8. What’s the Difference Between a Cosigner and a Joint Personal Loan?

A cosigner has responsibility for the personal loan without the ownership. They lend their good credit to help someone else borrow and could be responsible for making the payments if the borrower fails to repay the loan. With a joint personal loan, each borrower has equal ownership of the loan and responsibility for the loan payments. Find out if a joint personal loan is right for you.

9. How Else Might I Borrow the Money I Need?

Applying for personal loans online may not be the only way you can access the money you need. Some other ways you could access funds include:

  1. A Home Equity Loan or HELOC — If you have built up equity in your home, you may be able to borrow money against it through either a loan or a line of credit. Find out how much home equity you can access
  2. A 0% or low-interest credit card — If you’re certain you’ll be able to pay off your loan amount in a short period of time, taking advantage of a no or low interest introductory offer on a new credit card may be an option. Check to see how long that no/low interest offer lasts and whether or not you have to make a minimum monthly payment to keep the offer active during that time.
  3. 401(k) Retirement Plan Loan — When you borrow against a retirement plan, you won’t have to worry about your credit score or pay interest to a lender, however, a portion of your investments will be sold to fund the 401(k) loan. This means that during the duration of the repayment period, the majority of those funds will not be invested, and therefore will not be available for potential growth. It’s often advised that borrowing against a 401(k) is reserved as a last resort, as it is so important to save for retirement. 

10. Is the Lender Reputable?

It’s crucial that you know and trust the lender you’re going to borrow from and work with on your personal loan. You should never feel pressured to apply for a loan and when you ask about any possible fees, they should be disclosed freely and clearly. Finally, use the old adage, “too good to be true” as a guide as you apply for personal loans online. Learn more about personal loans at

Read more: How A Personal Loan Can Help During a Recession

All personal loans made by WebBank, Member FDIC.  

Cashing Out a 401k? Why It May Not Be The Best Emergency Fund Option

As we’ve discussed previously, there are several ways to build an emergency fund to help see you through a seismic life event or an urgent financial situation, but is cashing out a 401k one of the best options for an emergency fund?

The Financial Impact of Cashing Out a 401k

Cashing out a 401k may result in several consequences, some immediate and others that you likely will not feel for many years. Typically, in pre-COVID times, withdrawing from a 401(k) before the age of 59½ came standard with the following:

  • A 10% early withdrawal tax penalty.
  • Mandatory federal tax withholding of at least 20%.
  • The withdrawn amount being taxed as ordinary income, which may cause more taxes being owed, depending on your total yearly earnings, deductions, tax bracket, and other factors.

The CARES Act, however, changed all this.

Under the CARES Act, those impacted by the pandemic are permitted to access up to $100,000 from their 401k and other retirement plans with fewer consequences.

Before we consider whether cashing out a 401k is a viable emergency fund option, let’s dig deeper into what the IRS is now allowing regarding access to your 401k under the CARES Act:

  • The CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (such as 401k and 403b plans, and IRAs) to qualified individuals.
  • The 10% early withdrawal tax penalty does not apply to coronavirus-related distributions made in 2020.
  • There are no longer mandatory federal tax withholding requirements.
  • Cashing out a 401k in 2020 for coronavirus-related reasons will allow the tax burden to be spread out over a three-year period, starting with the year in which you receive the distribution. The IRS provides this example: if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022, while going on to note that you do still have the option of including the entire amount as ordinary income in the first year.
  • Should your finances improve after cashing out a 401k, you may repay all or a part of the amount withdrawn within three years of the date of distribution, and then claim a rebate on any taxes paid on the repaid portion of the 401k cash out.
  • 401k loan rules have changed under the CARES Act too. Previous retirement plan loan rules limited borrowers to accessing 50% of their vested balance as a loan but now plan participants can borrow 100% of their vested balance up to $100,000, and payments on 401k loans can be deferred for up to a year.

Is Cashing Out a 401k One of the Best Emergency Fund Options?

Should you have been impacted by the coronavirus pandemic, the CARES Act does make it easier and less painful to withdraw from or borrow against your 401k retirement plan. In those specific cases, cashing out a 401k may be a viable emergency fund option, however if you do not choose to repay the amount withdrawn under those new guidelines, you will still be in a position of having less funds available for your future and a potentially significant tax bill due next April.

Whereas both using the equity in your home through a HELOC or slowly building up a savings account to serve as your emergency fund each come with less immediate and long-term economic impact, cashing out a 401k creates an immediate taxable event (and if under 59 ½ years of age, may also come with that 10% early withdrawal tax penalty). Cashing out a 401k may also significantly reduce the amount you will have for your retirement and that may potentially elongate your working years. This is because, while your investments may still be growing and compounding, you will have sold all or a portion of those investments in the cash out, thus creating less potential for growth over time.

The Biggest Cost of Cashing Out a 401k

Most financial advisors would agree that cashing out a 401k should be the last resort option for an emergency fund, even if the ordinary taxes due are spread out over three years and the early withdrawal penalty is waived. This is because the biggest cost of cashing out a 401k is, potentially, opportunity cost. In selling 401k investments to fund the withdrawal, you could end up missing out on long-term growth should the stock market recover and continue to flourish at its historical average rate (average annualized return of the S&P 500 Index between 1973 to 2016 was nearly 12%).

Of course it’s challenging to consider the far off future if the present day situation is dire, but do think long and hard about cashing out a 401k and the impact it will have on your ability to retire and enjoy your later years, before taking that step to provide yourself and your family with an emergency fund.

Read more: How to use home equity for debt consolidation.