Retirement and emergency savings are two important financial goals that people should prioritize in their lives. Retirement savings are necessary to ensure that you have enough money to sustain yourself after you retire, while emergency savings can help you manage unexpected financial emergencies.
However, when it comes to prioritizing which goal to focus on first, it can take time to decide where to allocate your money. So what is the difference between retirement and emergency savings, and which should you prioritize?
What is Retirement Savings?
Investopedia said retirement savings refer to the money you set aside for your future, specifically your retirement years. These savings can come from employer-sponsored retirement plans like 401(k)s or IRAs or individual retirement accounts like Roth IRAs or Traditional IRAs.
This is essential because they allow you to maintain your lifestyle after you stop working. You may be forced to work longer or make significant lifestyle changes to meet ends without adequate retirement savings.
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What is Emergency Savings?
Another Investopedia article mentioned that emergency savings are the money you set aside to cover unexpected expenses or emergencies. These could include medical bills, car repairs, or job loss. Emergency savings are designed to help you manage unexpected financial hardships without relying on credit cards or other forms of debt.
This is also crucial because they can help prevent you from going into debt or making other financial decisions that could harm your long-term health.
Which Should You Prioritize?
Despite the increase in the 401(k) contribution cap to $22,500 for 2023, experts told CNBC that people shouldn’t sacrifice emergency reserves in order to maximize their plan.
According to a new Fidelity Investments report, more than half of savers would prioritize short-term financial objectives in 2023, including emergency funds. Furthermore, a recent poll by Personal Capital revealed that the top goal for 2023 would be to start an emergency fund.
Leslie Beck, a CFP and owner of Compass Financial Management in Rutherford, New Jersey, said she had a “rule of thumb” for choosing between retirement and emergency funds.
She always advises making enough 401(k) contributions to get the full employer match. People should “absolutely” shift any more money to increase that cash reserve if their emergency savings are still insufficient at that point, she said.
Beck advises single people to save “near to a year’s worth of critical costs” to pay for things like housing, food, and utilities. Depending on your position, several counselors have suggested recommending three months to a year’s worth of spending.
Her advice is modified for couples with two earners, however. Depending on the sector you work in, she advises reducing it to six months or even three months.
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