We always want to make the best of our personal finances – to stick to our budget, to have enough emergency fund, to start saving for retirement from day one and live happily ever after. In real life, we face daily dilemmas – should the pay raise go towards emergency or retirement funds. So, how should you prioritize all your financial goals? It seems like retirement is the less pressing one but don’t forget, this has the highest price tag too.
Remember the best way to set up your budget is the simple 50/30/20 rule. 50% of your take-home pay should be spent on essentials, 30% on your lifestyle, and 20% on financial goals. So, how do you prioritize retirement over savings and debts out of this 20% pie especially when all seems equally important?
1. Retirement always come first
This should be the number one financial goal for pretty much everyone. Inflation causes the value of every dollar you earn now to shrink year after year. By the time you hit retirement age, you will need more money every year to live than you currently need now. What’s more, Singapore has the fourth-best life expectancy rate in the world with women expected to live till 85. With the longer life expectancy rate and rising health care costs, there is a need to save more in order to retire compared to previous generations.
[Free Ebook] How should you invest your first $20,000?
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2. Emergency Savings
This is your second priority, because it is an emergency fund. You’ll never know when you will need this and it could mean resorting to chalking up credit card debts or borrowing from your retirement savings. Emergency funds should be strictly used only in dire straits and not to fund your fancy luxurious holidays. It could be a medical emergency, losing a job and having to pay rents and bills or bereavement-related expenses. Having an emergency fund will not only protect you, but also the other financial goals you have.
This may be third but it ddoesn’t mean it’s not important. It comes after retirement and emergency savings, but it also comes before your lifestyle expenses. That means that every month, you repay your debts first before buying the newest smartphone or going on that weekend getaway. Debt is a huge burden and can grow especially credit card debts. This is the first type of debt that you should always work on paying off first, and start with paying as much as you can to the one with the highest-interest rate then pay minimums for the others. Once all credit card debts are clear, prioritize with the next-highest-interest-rate debt.
Now you know the importance of retirement funds compared to your other financial goals. Start taking actions and know how much your retirement will cost and how much to put away each month. DrWealth has just the right tool to put this in place, and it doesn’t cost a single cent.