When it comes to
personal finance, there are a number of competing priorities that can make it
difficult to determine where to focus your efforts. For many people, the choice
between building emergency savings and working towards their retirement goals
is one of the biggest dilemmas they face. So, which should you focus on first?
In order to answer
this question, it’s important to understand what emergency savings and
retirement goals are and why they are both important. Emergency savings refers
to the amount of money you have set aside in a readily accessible account to
cover unexpected expenses, such as a job loss, medical emergency, or major home
repair. Retirement goals, on the other hand, are the plans you have in place to
provide for yourself financially once you stop working.
Both emergency
savings and retirement goals are important, but the order in which you focus on
them will depend on your individual financial situation. If you have a stable
income and few financial obligations, you may be able to focus more on your
retirement goals, knowing that you have a safety net in place in the form of
your emergency savings. However, if you have limited income and high debt, you
may need to prioritize building up your emergency savings in order to protect
yourself from financial shocks.
Emergency Savings First
Here are a few
reasons why emergency savings should come first:
Peace
of mind: Having a solid emergency fund in place can help you sleep better
at night, knowing that you have a safety net in case of an unexpected expense.
Protects
against debt: If you don’t have emergency savings, you may turn to credit
cards or loans to cover unexpected expenses, which can quickly spiral into
debt. Building up your emergency savings can help you avoid this trap.
Provides
flexibility: With an emergency fund in place, you have more flexibility to
make decisions about your financial future, such as taking on a new job or
starting a new business.
Retirement Goals First
However, there are
also some good reasons why focusing on your retirement goals first can make
sense:
Time value of money: The earlier you start saving for
retirement, the more time your money has to grow, which can make a big
difference in the amount you have saved when you retire.
Compound interest: The power of compound interest means
that the earlier you start saving, the less you have to save each month in
order to reach your goals.
Employer matching: If you participate in a 401(k) or another retirement plan at work, your employer may match a portion of your
contributions. By maximizing this match, you can significantly increase
your retirement savings.
Emergency Savings vs.
Retirement Goals
So, which should
come first? Ultimately, the answer will depend on your individual financial
situation and goals. If you have a stable income and few financial obligations,
you may be able to focus more on your retirement goals, knowing that you have a
safety net in place in the form of your emergency savings.
However, if you
have limited income and high debt, you may need to prioritize building up your
emergency savings in order to protect yourself from financial shocks.
In any case, it’s
important to find a balance between the two. You don’t want to neglect your
emergency savings and end up in debt when an unexpected expense arises, but you
also don’t want to neglect your retirement savings and end up struggling to
make ends meet in your later years. A good rule of thumb is to aim to have
three to six months of living expenses in your emergency fund, and then start
contributing to your retirement goals as soon as you can.
