If you happen to find yourself in the fortunate position of having extra money left over from your paycheck each month, then you’ll want to find a way to invest that surplus responsibly. Jim Barker of Barker Insurance Services is a personal financial representative who firmly believes that no matter what you do with your money, you should always be certain to pay a portion of your earnings back to yourself so that it’s there for you in the future. However, this philosophy can be applied to a regular savings account, a retirement account, or both. How does one know which area of savings to focus on?
For starters, the decision as to where to put your money can depend on your age. People within 10 years of retirement really need to focus on funding their IRAs and 401(k) plans in order to ensure that they’ll have the ability to stop working when the appropriate time comes. Of course, this isn’t to say that younger people shouldn’t make retirement savings a priority; but in some cases, it might make more sense to focus on that savings account while putting a smaller amount of money away for retirement. Those who are several decades away from retiring and are likely to need larger amounts of cash on hand in the near future are probably better served putting the majority of their extra income into a savings account versus a retirement account. This especially holds true for people who are looking to buy a house in the near future; while it’s important to contribute regularly to your retirement account, if you need to come up with that lump sum for a down payment on your home, then putting most of your funds into a retirement account won’t do you much good in that respect.
The decision as to whether to put more of your money into a savings account versus a retirement account can also depend on the opportunities with which you are presented. If the company that you work for matches 401(k) contributions, then adding your own funds to your retirement account can translate into free money for you - in which case, it would almost be foolish not to take it. Of course, even if your company doesn’t offer a matching program, it’s still a good idea to fund your 401(k) plan; but in this case, you should feel no obligation to do so at the expense of your savings account.
Regardless of which option you choose to focus on, Barker strongly advises that you always keep an emergency fund on hand with enough money to cover three to six months’ worth of living expenses. The money in your emergency fund needs to be instantly available so that you can access it in the event of an unforeseen circumstance. So even if your company does offer 401(k) matching, do not pump all of your excess earnings into that retirement account until your emergency fund is in place.
Of course, after all is said and done, you should contribute as much as possible to both your savings account and your retirement account. However, it’s important to realize that one does not necessarily have to take away from the other. With proper planning, you can fund both your savings and retirement accounts so that you have the right amount of money when you need it, be it right now or many, many years into the future.
