Should I pause my 401(k) contributions and divert the money to an emergency fund?

If you don’t save for emergencies and a major financial shock occurs — and it will — you’ll probably rely on debt to bail yourself out. 

According to a Bankrate survey, only 41 percent of Americans could cover an unexpected $1,000 expense, such as a car repair or an emergency room bill, with their savings.

Among those without savings, 1 in 4 would rely on their credit cards to address a financial emergency. Others would have to borrow from family or friends, or take out a personal loan. 

Depending on the situation, I have advised individuals to pause their retirement contributions to build an emergency fund. Once the person has a comfortable cushion, they can restart their contributions. I do have a caveat to this advice. If there’s not an immediate need for savings and there is a company match, I recommend contributing at least enough to qualify for that benefit. 

Ideally, aim to save for a rainy day and contribute to a retirement account. To do this, try to find areas in your budget where you can cut expenses. For instance, could you eat out less? I’ve worked with individuals who didn’t realize how much money they spent on meals outside their home. In some cases, it was several hundred dollars a month.