Often the trouble with saving is knowing where to start. There may be many ways to save taking into account the different tax types, liquidity access and where the savings may come from. However, there is a fairly basic order of operations that we generally recommend to maximize your savings. It is as follows:
- Employer-Sponsored Retirement Plans
- Cash Reserve
- Investments
This article will cover each of these in broad strokes, however it is worth noting that how and where you save may be impacted by your particular circumstances. Therefore, we suggest if you have any specific questions relating to your individual situation, please contact us.
Employer-Sponsored Retirement Plans
Saving in your work plan is an easy place to start for no other reason than it is automatically deducted from your pay (can be either pre- or post-tax reduction) and invested for you. Once you have set it up, you begin saving on a regular basis without conscious effort on your part.
So how much should you save in your plan? In most cases, you should look to maximize your match without exceeding it. This advice may change for tax reasons or liquidity needs, however maximizing your match is generally a good idea as it allows you to grow your retirement assets at a faster rate, with less impact on your liquidity.
By doing less, you may lose out on some significant growth in your account. If you don’t maximize your employer match you are losing out on “free” money.
By doing more, you begin tying up funds in an account with limited liquidity access and a future inherent tax burden. A part of laying down a good foundation for your eventual retirement includes diversifying your savings to allow you greater flexibility when you become fully dependent on those savings to fund your lifestyle. Therefore, when it comes to saving in retirement accounts, more is not always better.
Cash Reserve
Your cash reserve should be liquid and accessible. Therefore, your local bank is usually a great place for this. A well-established cash reserve should be funded enough to cover 6-9 months of expenses, so the amount will vary from case to case, but it should sufficient to cover your needs in the event there is a loss/reduction of income.
The main purpose of your cash reserve is to cover your day-to-day expenses and as such the overall value should be kept stable, and should be replenished recurringly, especially in the event of an unplanned singular significant withdrawal (e.g. medical expense, home repair, etc.).
Funding for additional planned expenses should be accumulated in advance in either an “earmarked” account for planned one-time expenses or can be saved in your regular banking account but in excess of your regular 6-9 months of expenses figure. Planned one-time expenses can include items such as home renovations, vacations, large purchases and so on.
It is important (and often overlooked) to maximize your cash reserve. Just because it is in cash, does not mean that there is no opportunity for growth. There may be opportunities to take advantage of competitive interest rates and when possible, try to keep the bulk of your cash reserve in your highest interest earning account.
As always, when keeping cash in the bank always bear in mind FDIC limits.
Investments
The final building block of savings in Investments. Once you have maximized your employer match and established a robust cash reserve, you may look at investing your excess cash. Investing can take many forms and there is no one-size-fits-all solution for formula on how to invest. Whether you are just starting out or have been investing for years, it is important to evaluate:
- Your liquidity needs (now and for the next few years) – Do you anticipate needing funds from your portfolio?
- Your tolerance for risk – How will you react emotionally to a possible loss or gain?
- Your capacity to take on risk – How much will a potential loss impact your portfolio and financial objectives?
- Your time horizon – Do you have time to recover after a potential loss?
- Your objectives – Do you want to leave a legacy or is your primary objective to support yourself?
All of these things should direct how you invest so that suits your needs and your comfort levels. Translating your needs and your wants into a comprehensive investment strategy may require professional input.
If you’re interested in learning more about maximizing your savings and developing a cohesive investment strategy suited to your needs and comfort level, contact us. We’re happy to help!