Turning Savings Into a Financial Plan
Once you have built a habit of saving, the next step is deciding what to do with the money and how to start your path to financial freedom. With a clear strategy, you can maximize your savings and use them to achieve your financial goals.
This is part two of a series on saving and managing money, focusing on turning savings into a comprehensive plan. If you missed part one, where we discussed how to start saving, click here to read it.
1. Start with an Emergency Fund
An emergency fund is your first financial safety net. It covers unexpected expenses, like car repairs, medical bills, or job loss.
- How much to save: Aim for 3–6 months of living expenses. For example, if your monthly expenses are $3,000, save $9,000–$18,000. There is no hard rule for emergency fund size. If you feel more comfortable having a year’s worth in an emergency fund, that’s what you should do.
- Where to keep it: Use a high-yield savings account for accessibility and to earn extra interest. Another alternative is to open a brokerage account and put it in a money market fund.
2. Max Out Employer Benefits
If your employer offers a retirement plan match in your 401(k), 403(b), or 457, prioritize this step:
- Contribute up to the match: For instance, if your employer matches 100% of contributions up to 3% of your salary, contribute at least that much to get the full benefit.
- Think of it as free money: Employer matching accelerates your savings at no additional cost and is part of your compensation package.
3. Focus on Tax-Advantaged Accounts
Once your emergency fund is in place and you are maximizing your employer match, move on to tax-advantaged accounts:
- Roth IRAs or Roth 401(k)s: These accounts allow tax-free growth and withdrawals in retirement. If your employer offers a Roth option in your 401(k) plan, you will want to maximize this as much as you can. If not, then you will want to fund a personal Roth IRA.
- Traditional retirement accounts: If you are not offered a Roth 401(k) and you’ve maxed out your Roth IRA contributions, you will want to consider maxing out the remainder of your 401(k). This allows your investments to grow tax-deferred and compound for many years.
- Health savings accounts (HSA): For those with a high deductible health plan, you can put away and have the money compound tax-free in an HSA. Withdrawing money for medical purposes is tax-free and, after a certain age, withdrawing for other purposes is similar to a traditional IRA.
Maximizing these accounts enables automated savings as well as boosting your long term wealth through investing.
4. Expand to Taxable Investments
If you have maxed out your tax-advantaged savings, taxable brokerage accounts can help:
- Why use them: These accounts provide the foundation for making your money work hard for you through investments. They are also flexible enough to draw down in the event of an emergency or change in life plans.
- Investment options: Choose a mix of stocks, bonds, or index funds based on your risk tolerance and time horizon. An advisor can also help you manage the assets in these accounts.
5. Save for Enjoyment, Living, and Financial Flexibility
Do not forget to enjoy your hard-earned money. Allocating a portion of your savings for specific goals can keep you motivated while still planning for the future. Examples include:
- Saving for a dream vacation.
- Funding hobbies or personal milestones.
- Down payment for a house, car payments or home improvements
6. The Path to Financial Freedom
Your savings are not just numbers in an account, they are tools for creating options and reducing financial stress. More importantly, having wealth enables you to make life choices without the stress of financial sacrifice. By following a clear plan, you can ensure your money supports both your present and future goals. Bottom of Form
As director of research and a member of the firm’s investment committee, Rosa’s primary responsibility is overseeing a team of analysts who enhance the investment performance of the firm’s portfolios by conducting research and analysis on individual stocks, industries, and macroeconomic topics. She is also a portfolio manager.
Rosa has worked in research and portfolio management for investment firms for over 20 years. Most recently, she was the co-head of equities at New England Asset Management. Previously, she worked for Mesirow Financial Investment Management as a portfolio manager and Deloitte as an investment consultant. Rosa has achieved the designations of Chartered Financial Analyst® and Certified Public Accountant.
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