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It is not easy to prioritize financial goals, especially when choosing between two important factors in an unstable economy: saving money for retirement or creating an emergency fund.
While there are higher 401(k) contribution limits for 2023, you shouldn’t be missing out on rainy day savings to make the most of your retirement plan, experts say.
Indeed, more than half of savers prioritize short-term financial goals in 2023, including savings for contingencies, according to the study. recent training from Fidelity Investments. And a recent personal wealth study found building an emergency fund a top priority for 2023.
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“It’s always a balance,” says certified financial planner Katherine Valega, founder of Green Bee Advisory in Boston. While the goal should be to maximize your 401(k) as much as possible, your emergency savings are just as important, she says.
Leslie Beck, a Rutherford, NJ-based CFP and owner of Compass Wealth Management, said she has a “rule of thumb” for choosing between retirement and saving for emergencies.
She always recommends putting enough money into your 401(k) to get full company compliance. Then, if your contingency savings ran out after that, you should “definitely” divert the funds, she said.
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If you’re single, Beck suggests keeping “approximately a year’s worth of basic expenses” to cover needs like your home, food, and utilities.
“You must have a year’s supply [of essential expenses] in case of a downturn in the labor market, which we may not be close to,” she said, noting that it often takes longer than expected to find a job after being laid off, especially for employees with higher wages.
However, her recommendation changes for double-earner couples. “I cut that down to six months, maybe even three, depending on what industry you’re in,” she said.
And there may be some flexibility if you have access to a home equity line of credit, which could be another source of cash for emergency expenses, Beck said. But you have to be “very prudent” when using your home equity because borrowing after you lose your job can put your home at risk, she said.
Valega suggests setting up a reserve fund of 12 to 18 months of spending, acknowledging that she is “more conservative than most,” but says the exact number depends on your career and personal preferences. For example, it might encourage tech clients to save more than healthcare providers.