How Should I Prioritize My Savings Goals?
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You probably already know that it’s important to save money for your future, but with so many potential savings goals — retirement, an emergency fund, your child’s college, a down payment on a home — it can be difficult to figure out how to prioritize them all. How do you know where to focus your efforts first?
Like many personal financial decisions, the choice of where to focus your savings will ultimately depend on your unique circumstances, wants and needs. However, if you’re lost on a place to start, it’s a good idea to begin with your 401(k) or other retirement plan before building up an emergency fund and then tackling any other savings goals you may have, such as a home down payment or college fund.
Contribute to your 401(k)
While retirement may seem far off for some people, it’s generally a good idea to start making contributions to your 401(k) or another similar retirement plan as soon as the opportunity presents itself. If your employer has a 401(k) matching program, take advantage of it as soon as possible — the employer contribution is like saving free money. Your retirement fund is an investment, meaning it will grow exponentially over time, so the sooner you start saving, the more time you’ll have to capitalize on this growth.
Retirement is likely to be the financial milestone you're farthest from, but it’s also one of the steepest hills to climb. You want to ensure that you’re contributing to your retirement funds for as long as possible so you don’t find yourself coming up short mid-retirement. For that reason, try to contribute at least a portion of your income to your retirement account every pay period. The amount you contribute may change over time and vary with your age, income and overall level of financial security, but it’s a good idea to always save at least a small amount toward retirement.
Build a robust emergency fund
Next, focus on building up your emergency fund — a safety net that will help you avoid debt in the case of unforeseen circumstances, such as a spouse losing their job or a large medical bill. A typical emergency fund should be enough to cover three to six months of your total expenses, though the exact amount will vary based on your unique financial situation.
Creating an adequate emergency fund takes time and effort, but it will leave you feeling much more secure in your finances. Start by trying to save 10 percent of your net income each month. If this isn’t a realistic goal for you right now, begin with 5 percent and gradually increase that number as your financial situation improves.
You only want to access your emergency fund when absolutely necessary. For example, a flooded basement would surely warrant tapping into your emergency savings, but splurging on a new television probably wouldn’t qualify. When figuring out if you should dip into your emergency fund, ask yourself three questions:
- Is it an unexpected expense?
- Is it absolutely necessary?
- Does it cover an urgent need?
Tackle other savings goals
Once you have a handle on your retirement and emergency funds, you can begin to accomplish any other savings goals you have, whether it’s saving for a down payment on a home, a new car, anticipated travel or a college fund for your child.
Whatever your goals are, it’s smart to put your savings into an interest-earning account so your money can grow over time. While a regular savings account is a safe place for your money, there are other options — such as money market accounts or CDs — that come with higher interest rates.
Ultimately, regardless of where you channel your savings, the most important thing you can do is make sure you have wiggle room in your monthly budget so that you’re able to save money and avoid racking up debt.
