Checklist before saving

- This communication is for informational purposes only and is not intended as tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. You can review the full disclaimer of this course in the link below. Have you ever wondered when the right time is to start saving for retirement? You've probably heard, the earlier the better, which is true, but how early? And are there other financial priorities that should come first? In this lesson, I'll cover when to start saving for retirement and what other financial tasks to check off the list before getting started. And if you've already started saving for retirement, I'll show you how to maintain your momentum towards retirement and get the other stuff done, too. Before putting money into retirement accounts, it's important to make sure you have some other financial bases covered, so you'll never, well, hopefully never, have to take money out of your retirement accounts for shorter-term needs. Retirement accounts come with tax benefits, which are super helpful when it comes to saving for retirement, but they also come with taxes and penalties if you take the money out early. So first things first. Make sure that you have enough cash flow to actually contribute to retirement. A good rule of thumb is that from a cash-flow standpoint, you're ready to start saving for retirement if you are consistently making at least your minimum payments on all debt and your balances are either steady or going down over time. If your credit card debt is trending upwards over time, you're likely spending more than you make, so any amount that you save towards retirement could actually end up increasing your debt unless you make some changes to your budget. Now, I want to clarify, you do not have to have all of your debt paid off before you start saving for retirement, but it's important that you aren't accumulating debt over time. Next, make sure you have cash available when something unexpected happens. You want to avoid taking money out of retirement accounts early because you could face taxes and penalties for early withdrawals. So I recommend that you start with a base amount in your emergency fund equal to one month of your income before you start putting money away in retirement accounts. Your emergency fund is meant to be used when something unexpected happens: losing your job, a water heater repair, an unexpected medical bill, that kind of thing. Once you have at least one month of income in your emergency fund, you can start to incorporate retirement savings slowly, but also continue to build your emergency fund until it's full, which is typically three to six months of income. As you've probably noticed, I don't recommend that you finish one goal completely before starting another. Otherwise, you might not get around to saving for retirement for a really long time. But you do want to have a base level of financial progress before you add in retirement savings. So, before saving for retirement, make sure you have that one-month emergency fund. You're making minimum debt payments consistently. You have debt balances that are trending downward over time. And here's the last box to check. Make sure that you have the right insurance in place to reduce the possibility of a large unexpected expense. By putting the right insurance in place, you reduce the chance of having to use retirement money for shorter-term cash needs. Look at your health insurance, renter's insurance, or homeowner's insurance and auto insurance as a good place to start. If you've already started saving for retirement but you haven't established an emergency fund, gotten your debt payments and spending under control, or put the right insurance in place, you may want to reduce the amount that you're saving for retirement, just temporarily, to find extra dollars for those other priorities. For example, if you're saving 8% into your 401k and getting a 3% match on the first 3% that you contribute, you could reduce your retirement savings to 3% and still get your whole match and use the other 5% to build your emergency fund. Try not to stop the habit of saving for retirement altogether, but slow down a bit as you polish off your other foundational priorities. So do a quick inventory check to see if you're ready to start saving for retirement. Do you have at least one month in emergency fund? Are you making minimum monthly debt payments consistently? Are your debt balances trending downward over time? Do you have basic insurance in place? If you've got your bases covered, you're in a good place to get started.