Reason that Cash is King

Those of you who have read my blogs in the past know that I am a proponent of having an ample, but not excessive, amount of cash on hand.  This emergency fund will pay off for you handsomely at one time in your financial life, and help you sleep better all the time.  But now there is another reason to keep ample cash on hand - access to one of the (inappropriate and harmful) alternatives often used by people tight on cash could be blocked.

Today, two senators announced that they are introducing legislation that, in an effort to counter the erosion of retirement assets, would limit the ability of workers to tap their 401(k) retirement plans for loans.

"During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy-day funds," Senator Herb Kohl, a Wisconsin Democrat, said in a statement obtained by Bloomberg News. "A 401(k) savings account should not be used as a piggy bank for revolving loans."

Almost 28 percent of participants in 401(k)-type accounts had an outstanding loan at the end of 2010, which is a record, according to a study released today by benefits consultant Aon Hewitt, a unit of Chicago-based Aon Corp.

"The big risk with loans is that participants leave their job," said Alison Borland, head of retirement strategy for Aon Hewitt.  Most 401(k) plans require employees to repay loans in full when leaving a job, usually within 60 days, said Borland.  Almost 70 percent default, Borland said, so the unpaid funds get counted as taxable income and may add to the burden of a jobless worker.

One of my key tenets of smart financial management is to avoid having to buy or sell something on short notice (also know, invariably, as "the wrong time").  Executing that plan requires having the appropriate amount of cash on hand to protect you, should you experience an emergency or your income is reduced or eliminated.

And even though Congress has your best interests in mind when trying to keep you from borrowing against your 401(K), it does close an option for you and require you to look seriously at how much cash you are holding.

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