Having an emergency fund is important. So is saving for retirement. If you have a limited amount of money to work with, you might be unsure about which goal you should focus on first.
The answer will depend on your specific circumstances. Here are some factors to consider.
Why You Need an Emergency Fund
Life can throw you a curve ball, which is why it’s vital to have an emergency fund. You’ll be able to tap into your savings to cover a large, unanticipated bill for something like medical care or a home or car repair. An emergency fund can be a lifeline if you lose your job or face a significant pay cut. With a robust emergency fund, you’ll be able to avoid accumulating high-interest credit card debt or taking out a high-interest loan to pay your bills.
Why You Should Start Saving for Retirement Early
Social Security probably won’t cover all your expenses after you stop working. You’ll have to save for retirement on your own to have enough to live comfortably.
Money that you invest can grow from compounding. Your contributions can earn interest, which can increase your balance. Then the total balance can earn even more interest.
The sooner you start investing, the more you’ll benefit from compounding. If you begin when you’re young, you’ll be able to set aside relatively small amounts each month and see your savings balloon over time.
Many companies offer a 401(k) with a match. If your employer is one of them, those additional contributions can help you reach your investment goal faster.
What to Focus on
No matter how old you are or how much money you make, you should have an emergency fund. Personal finance experts generally recommend having enough to cover essential living expenses for three to six months. You’ll have to figure out what’s right for you.
If your job is stable or you have income from multiple sources, you might be comfortable having enough set aside to pay your bills for three months. If your job is less secure, or if you just want added peace of mind, you can aim to save more.
Once you’ve got a safety net in place, saving for retirement can become your top priority. That’s not to say that you can’t invest while building your emergency fund. If you can afford it, you can put money toward both goals at the same time. You’ll have to consider your monthly income and expenses and figure out how to allocate the funds you have available.
