BALANCING YOUR SAVINGS GOALS
Experts often suggest saving 10-20% of your gross income. But what exactly do you do with the money once you’ve set it aside? If you’re like most people, you have multiple financial demands competing for your savings. The key is finding the right balance.
Everyone should have savings to draw on in case of emergency: loss of a job, unexpected health problems, and other of life’s unpredictable curve balls. If you don’t have money set aside in advance, you might have to pile up debt just to get by - making a bad situation worse.
As a general rule, you should have 3 to 6 months of living expenses set aside in a readily accessible, liquid account, such as a bank savings account or money market account. It’s important, though, to personalize this advice. Do you have children or others who depend on your income? Do you have credit card payments, car payments, or insurance premiums to cover? How long would it take you to find a new job if you had to? You might find that your situation requires a larger emergency fund than the standard suggestion.
If your "rainy day" fund is lacking, start putting aside a portion of your total savings each month until you reach your goal. At the same time, focus on paying down your debts - especially expensive credit card debt - so that your savings will be able to stretch further. Once you’ve built up your rainy day savings, resist the temptation to dip into it for non-emergencies.
Saving for retirement is probably the biggest financial challenge you’ll ever face. Remember, it takes a significant amount of money to maintain your standard of living in retirement for 20 years or more. Social Security alone will not be enough, and future changes to benefit levels are likely.
Fortunately, you have help. Your company’s retirement plan is an excellent place to start. First, salary deferrals make saving automatic and practically painless. Once in the plan, your savings can grow tax-free until you make a withdrawal, usually in retirement. This allows your savings to grow faster than they would in a regular, taxable account. In addition to your company-sponsored plan, you can make contributions to a personal Traditional or Roth IRA, which offers tax advantages to help your savings grow. Make the most of these opportunities to save!
Depending on your age and how much you’ve already saved for retirement, commit to saving a minimum of 10% of your income specifically for this goal. If you haven’t accumulated much of a nest egg so far and/or you’re approaching retirement age, you may need to save 20% or more. Keep in mind that retirement account withdrawals made prior to age 59 1/2 may be subject to a 10% penalty in addition to ordinary income taxes. Your financial advisor can help decide how much is right for your situation. Finally, don’t procrastinate. The longer you wait to start or increase your retirement saving, the less time you have to benefit from the power of compounding to grow your account.
Annual tuition costs at a four-year private institution continue to rise. To save for such a substantial expense, investigate all your options. There are tax-advantaged accounts like Education Savings Accounts and state-sponsored 529 college savings plans, which you could supplement with regular mutual fund investments. Don’t forget that financial aid and loans are also widely available to help cover costs.
With the high cost of college tuition, it might occur to you to divert some of your savings away from retirement to fund your child’s education. After all, retirement seems so far away and college is right around the corner, right? Don’t do it. You can always seek out financial aid, scholarships, and student loans for college, but no one will offer you a loan or a grant to live comfortably in retirement. Save what you can for college, but don’t sacrifice your long-term financial security.
Your other financial goals might include a down payment on a new house, your daughter’s wedding, a new car, or your annual vacation. Take the time to estimate how much you’ll need for these types of expenses, and how long you have to save for each goal. Then, your financial advisor can help you choose how to save to reach that goal — perhaps in a low-risk investment for short-term goals, and a combination of stock or bond mutual funds for longer-term goals.
Do the best you can to save in advance for these kinds of goals. Imagine how much more relaxing your vacation would be knowing you don’t have to face a big credit card bill upon your return! However, don’t compromise your essential savings — rainy day and retirement saving — to pay for “extras ”like a vacation or a new car. Scale back on this optional spending until you’ve met your essential savings goals.