Which is more important, emergency savings or retirement savings?
Survey says… it depends.
While it may feel like the safe answer, ultimately what you focus on will depend on your individual financial situation and goals. Let’s breakdown some of the benefits of both.
Why 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.
Why 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 when working towards your goals.
Employer matching: If you participate in a 401(k) or other retirement plan at work, your employer may match a portion of your contributions. By maximizing this match, you can significantly increase your retirement savings.
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. But to be safe, speak to a financial advisor at Diener Money Management about your unique situation, and they can help you get on the right track.
