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Prioritizing financial goals isn’t easy, especially when choosing between two imperatives in a volatile economy: saving for retirement or building your emergency fund.
while are Higher 401(k) Contribution Limits For 2023, experts say, you shouldn’t put off saving for a rainy day to maximize your retirement planning.
In fact, more than half of savers are prioritizing short term financial goals in 2023, including emergency savings, according to a a recent study From Fidelity Investments. and recently got a personal capital survey building an emergency fund Top priority for 2023.
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“It’s always a balance,” said certified financial planner Katherine Vallega, founder of Green Bee Advisory in Boston. While maxing out your 401(k) should be a goal, your emergency savings are also important, he said.
Leslie Beck, a Rutherford, New Jersey-based CFP and owner of Compass Wealth Management, said she has a “rule of thumb” for deciding between retirement and emergency savings.
She recommends always contributing enough money to your 401(k) so that the entire company can receive the match. Then, If your emergency savings are low After that, you should “definitely” divert the funds, he said.
How to know if your emergency savings are enough
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If you’re single, Beck suggests keeping “close to a year’s worth of essential expenses” to cover necessities like your home, food and utilities.
“You should have a year’s worth [of essential expenses] If there’s a downturn in the job market, that’s where we may or may not go,” she said, noting that it takes longer than expected to find a job after layoffs, especially for higher-compensated workers. .
However, her recommendation changes for dual-earner couples. “I got it down to six months, maybe three months, depending on what industry you’re in,” he said.
and there may be some flexibility if you have access to a home equity line of creditwho could be another source of cash for emergency expenses, Beck said. But you need to be “very judicious” when tapping equity because borrowing after a job loss can put your home at risk, she said.
Valga suggests an emergency fund for 12 to 18 months’ worth of expenses, admitting that he’s “more conservative than most,” but says the exact number depends on your career field and personal preference. For example, she might encourage clients in tech to separate more from health-care workers.