How to prioritize savings when you're just starting out
You can save in a way that balances short-term needs with longer-term goals
Conventional wisdom tells us to save early and often. But when you’re just starting out and have limited resources, plus multiple financial goals and responsibilities, it can be hard to determine how to allocate your savings. Here’s a roadmap.
Accidents can happen to anyone. And when they do, they can take a heavy financial toll. Without savings in place, an unexpected car repair, job loss or trip to the hospital could force you into debt and derail your goals.
That’s why many experts recommend putting three to six months of living expenses into an emergency fund. But if that seems impossible, start smaller. Save an amount that feels reasonable—it could be $25 a week. Remember, the most important thing about your emergency savings is that it’s easily accessible. Put the money in an account like standard savings or money market where you can draw on it when needed.
With your emergency fund in place, you can turn your attention to retirement. It may feel far away, but the earlier you begin putting money away, the more potential your money has to grow. A 401(k) or IRA allows you to invest your income with certain tax benefits. What’s more, many employers will offer to match a certain percentage of your contribution to 401(k) accounts. That’s added money, which can accelerate your savings efforts.
Once you’ve established your emergency savings and are contributing to your retirement, start building towards your short-term goals. Whether it’s saving for a vacation, your wedding, or the down payment on a home or new car, it’s helpful to determine how much money you need, as well as when you need it.
Debt can drain your savings efforts and make it challenging to prioritize your goals: Should you save or pay down an outstanding balance? That decision depends, in part, on the interest you pay.
For example the average credit card charges an annual percentage rate (APR) of 15 percent, according to Bankrate. That might be more than you can earn by saving or investing your money. If you carry high-interest debt, paying it down aggressively can save you a lot over the long term. Student loans, on the other hand, tend to have lower interest rates—in that case, you can pay them down while putting money toward savings. Once your balance is paid off, you can beef up your savings even more.
Your savings goals may change and evolve with your circumstances. But having a savings plan in place for today and tomorrow can help prepare you for the unexpected, and put you on the path toward achieving your goals.
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