When it comes to saving, there are so many items that you need to account for. It can get to a point where the list is actually overwhelming. A few of the most popular saving list items are retirement, of course, university education for your children, maintenance for your home or automobile, future medical bills and possibly paying off a mortgage early. All of these items are very important; however we will look at which ones should be your priority.
It is important to understand very early in your life or career that saving for your retirement is THE most important saving item on any list. The reason is that you are essentially saving for a twenty to thirty year period of your life where you will most likely not have any income and will rely wholly on your savings and investments.
Other items also have alternatives that can be exhausted in the event that you are unable to save adequately for them. For instance, your kids can take out student loans to pay for their education, that car you always wanted can be bought with an auto loan from the bank and you can take a personal loan for the vacation you wanted so badly, or it can be postponed or skipped altogether.
However, there is no alternative for retirement, there is nothing called a “retirement loan.” That is why it is up to you, and you only, to make sure that your future after retirement is properly accounted for. A general savings rule for retirement is to save anywhere between 10-30% of your monthly income. Consulting a financial advisor will help you understand the different ways to put this money to good use and ensure that it is giving you the best return rather than sitting in a savings account or time deposit.
2. Emergency Savings
Next on the priority list comes your emergency savings fund. What constitutes an emergency saving you ask? This could be anything from unforeseen car and house maintenance to unexpected events like losing a job. Having a safety net in place can help to ease the burden.
Most financial experts say that saving anywhere between 3 to 9 months of your salary should be a good enough safety net. There is a catch however, and that is if you have high-interest debt that needs to be paid off.
3. Eliminating Debts
Eliminating your debts is the best way to free up your income for other expenditures. Living under a heavy burden such as high debt can be very stressful and difficult to pay back especially if interest rates are high.
Two schools of thought exist on how to pay back your debt in a methodical way. The first is a method called “debt stacking,” which states that debts should be paid according to highest-interest first, such as credit card debt. The second school of thought, known as the “debt snowball,” says that one should pay off their smallest debts, disregarding the interest rate.
Some people prefer to pay off their debts before saving a dime. The idea is that more money is available to pay off the debt and avoid increasing interest payments.
Whatever the method of saving you prefer, you should always keep these three key points in mind and try to accommodate each one accordingly. Only then should you commence saving for more exciting things like a new car, a vacation or even a cruise!