Tips on Saving for an Emergency Fund, Retirement and a Home All at Once

Modern married multi-ethnic young couple calculating financial bills at home.
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It can be intimidating to figure out how to save toward all of your financial goals at the same time, especially when you’re trying to pay your regular bills, too. Your paychecks can only stretch so far, but if you delay saving for your long-term goals while you focus on the short term, you’ll miss out on valuable tax breaks and other benefits that can make it easier to build your savings for the future. The longer you wait to start saving for retirement, the more money you’ll have to set aside to reach your goals.

Meanwhile, you may also want to buy a house in the next few years, and realize the importance of having an emergency fund so unexpected expenses don’t derail your financial plans. The key is to juggle saving for all of these goals at the same time. Here’s how to make it work.

Start With Manageable Goals and Special Benefits

Saving for three major funds simultaneously can be daunting, but you can begin by setting aside a small amount toward each one and increasing your savings through time.

Even though you may not retire for many years, don’t miss the opportunity to start building your savings now and taking advantage of tax breaks and help from your employer — which can stretch your savings even more. You may start out with the goal to save enough in your 401(k) to get the full match from your employer — that’s free money. “Retirement savings is the top priority and the easiest,” said Kathryn Peyton, a certified financial planner in Sonoma County, Calif. “That’s usually easy to do because it comes out of your paycheck before you can spend it.”

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Then increase your contributions as you get raises and bonuses. “Many 401(k) plans have the option for you to automatically increase your contribution on an annual basis, so as your income increases and you become more comfortable saving, you will automatically be putting more away for retirement,” said Gerald Grant III, a certified financial planner and Equitable advisor in Washington, D.C.

You can use a similar strategy with your other financial goals. It’s important to have an emergency fund so you can avoid high-interest debt or raiding your retirement accounts if you have unexpected expenses. Financial advisors often recommend keeping three to six months of expenses in an emergency fund. You don’t have to start out with that much though, especially when you’re young and don’t have a lot of financial responsibilities.

Peyton recommends that someone in their mid-20s who doesn’t own a house yet start with a goal of having $500 in an emergency fund, then increasing the amount through time. “As you get older and you have a mortgage and children, that number goes up,” she said. She recommends keeping at least $2,000 in an emergency fund in your 40s, and at least $4,000 when you’re in your 60s, and thinking about how you can access additional money if needed, such as through a low-interest credit card you can pay off quickly or other accounts.

For example, you can save additional money in accounts that do double duty, such as a Roth IRA. You don’t get a tax break for your contributions to this retirement-savings account, but you can withdraw the earnings tax-free after age 59 ½. You can also withdraw your contributions at any age without taxes or penalties. This can be a good way to save beyond your 401(k) if you’d like to set aside more money for retirement but worry that you may need to access the cash in an emergency. You can contribute up to $6,000 to a Roth IRA in 2022 (or $7,000 if you’re 50 or older) if your modified adjusted gross income is less than $129,000 if single or $204,000 if married filing jointly. The contribution amount starts to phase out above that income level, and you can’t contribute to a Roth IRA if your 2022 income is more than $144,000 if single or $214,000 if married filing jointly.

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Save Far in Advance

If you start saving for retirement when you’re young, you’ll need to set aside less money to reach your goals. Even if you can only afford to start with small contributions, that money can grow through time.

You can use the same approach to saving for a down payment on a house. Don’t wait until you’re ready to buy a house to start saving — do it years before you plan to buy. That way, you can save a smaller amount over a longer time period, making the goal much less intimidating. “One of the best strategies is to start saving as soon as possible,” said Jacob Channel, LendingTree senior economic analyst. “The more time you spend saving, the more money you’ll end up with once it comes time to make a down payment.”

It helps to start doing some research a few years in advance.  “How much a person should set aside for a down payment will vary depending on a variety of factors, including how much money they earn each month, what kind of monthly housing payment they can afford, and how much the house they want to buy costs,” said Channel. You can adjust your goal as these specifics change through time.

Channel recommends making your down payment the third priority, after saving for retirement and building your emergency fund. “Generally, you should aim to save up as much as you can without neglecting your other financial goals,” he said. “In other words, you shouldn’t put so much money toward a down payment that you’ll have nothing left over in case of an emergency. A higher down payment can lower your monthly housing costs, but those lower costs might not be worth sinking every penny you own into a down payment.”

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You may not need to save as much for a down payment as you think, he said. “Though a down payment of 20% is often recommended by mortgage experts, it isn’t a hard rule,” he says. “In fact, with certain loan types — like an FHA loan — you can qualify for a mortgage with as little as 3.5% down. By doing research and determining what kind of loan you’re going to apply for and how expensive that loan will be, you can better determine how much you need to set aside for a down payment.”

Automate Your Savings

Automating your savings makes it a priority, before you have a chance to spend the money on anything else. “You can’t do it if you wait until the end of the month and see what’s left. That will never happen,” said Peyton.

That’s one of the benefits of a 401(k) — the money automatically goes from your paychecks directly into your retirement savings. If you boost your contributions when you get a raise or bonus, you save more money automatically before you have a chance to get used to having it.

You can set up similar automatic investments for your emergency fund and down payment savings by having a set amount of money transferred from each paycheck into online savings accounts for those goals, and increasing that amount through time. After you reach your goal for your emergency fund, you can then devote more money towards your down payment. Keep the money separate from your regular bank account, so you aren’t tempted to spend it on everyday expenses and it’s easier to watch the money grow.

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If savings goals seem too lofty at first, Peyton recommends starting small and gradually increasing the amount. “Figure out what you can afford in your budget, and maybe start with having $100 or $200 automatically taken out of each paycheck,” she said. “Then raise the amount every three months — maybe to $250 and then $300 and more. When you get bonuses and raises try to devote most of that to the savings account and not spend it. Make sure that when you do get these windfalls, that you’re committed to saving at least a big chunk of that.”

Find Extra Money in Your Budget To Save

You may have more money in your budget than you realize, so Grant recommends tracking your expenses for a few weeks to see where your money actually goes. “Once you have a detailed list of your expenses, it will be easier to see which areas have the most room for adjustments,” he said. You may discover that you’re spending a lot of money on things that don’t make as big a difference to you, and find easy ways to cut back.

“When I did this exercise, I found out I was spending way too much money on dining out and entertainment,” he said. “As a result of this, I began to cook three days per week and I picked one weekend a month not to go out. These minor changes decreased that area of my budget by almost 40%, which gave me additional money to put towards savings.”

You don’t have to cut out all of the fun and make budgeting unpleasant either. Instead, being aware of what you’re spending the money on may make it easy to cut back on things that aren’t as important to you. “Finding ways to still do the things you enjoy doing will allow you to achieve your goals faster and help you enjoy the process along the way,” said Grant.

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Finally, another way to free up more money to save is to boost your income. “There are only three ways to create additional funds for savings: decrease expenses, increase income, or a combination of the two,” said Grant. “Often, we only focus on number one. However, sometimes you can get to a point where you’ve cut the expenses to the bare minimum and it’s still not enough. Whether it’s a part-time job or a career change, sometimes additional income is the only way to make it happen.”

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