Now that you are ruthlessly saving. How should you parse your savings? Here's how I divide up my savings.
My first goal is to create an emergency fund. Many articles suggest 3-6 months. I personally like 1 year's salary before taxes. That will give me quite a buffer. And will likely last 2 years should I ever need it. (Remember, we pay about 30% or more in taxes).
Next is my retirement. If your employer has a 401K with matching contributions, DO IT! At least up the match. It's like getting a raise equal to the match. My employer does not match my 401K contributions, but I still contribute the maximum each year. Next is a deductible or Roth IRA. Either one is about the same. A colleague proved to me that after taxes, they are the same. (Let me know if my colleague is wrong.) I put the maximum into my wife's and my IRAs.
Next is for our kid's college. I don't want them to be saddled with student loans like in the tens of thousands. I plan to scrimp on the ballet lessons and put what I save towards their college tuition.
Next is for things to buy. I always save for a car and pay cash. I also pay cash for funiture, vacation, or other big expense. I don't want to paying 7 -21% more for my big ticket items due to interest. I'd rather pay cash and have the interest avoided go into savings.
This is not financial advice. Please consult a professional advisor.
Copyright © 2006 Achievement Catalyst, LLC
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