A blog written with parents in mind
Prioritizing Types of Savings
We learned in our 2016 Parents, Kids & Money survey that parents are mistakenly prioritizing college savings over retirement savings. When asked which is a higher priority for you and your family, 67% of parents said that saving for their kids' college education was more important than saving for retirement. While it is important to save for your kid's college, it is even more important to actively save for retirement.
Remember that when it comes to retirement, your income may be limited to Social Security, defined benefit plans (like a pension), and personal savings — in fact, personal savings will likely make up a large portion of your retirement income. With kids' college education there are more funding options in addition to personal savings — scholarships, grants, or loans, for example. Keeping this in mind as you prioritize your savings will help you stay focused on the right goals.
When looking at the money you have left over each month, consider all of the things you can be doing with it and prioritize from there. A few suggestions are below, in priority order:
- Emergency Fund — Saving for emergencies is critically important because you never know when an unexpected expense might pop up. Our survey found that 72% of parents do not have sufficient emergency funds to cover at least three months' worth of living expenses, and 49% of parents who do not have an emergency fund at all. Try to save enough to cover 3-6 months worth of expenses, and put those funds in a separate account so you won't be tempted to use it for non-emergencies. Once your emergency fund has sufficient funds, you can stop contributing and re—allocate your savings elsewhere (until you need to use it, and then replenishing the fund goes to the top of the list).
- Retirement Savings — 53% of parents agree with the statement, "If I save 6% of my income toward retirement, I'll have enough money to comfortably retire at age 65." We recommend you save at least 15% of your income towards retirement, including any company match.
- Debt Repayment — We found that parents have, on average, 2.25 types of debt to be paid off. It's important to work toward repaying your debt efficiently to prevent the interest from piling up. Put what you can toward debt each month, and prioritize paying off higher interest debt like credit cards before you tackle lower interest debts, such as student loans.
- College Savings — Save what you can! Instead of letting the total cost of college intimidate you, start by creating a personal goal and working toward it each month. Maybe it's saving for one or two years of college. Maybe it's a specific dollar amount you want to reach — either way, you'll be helping your child in the long run.
- Additional Savings Goals — Save for things like vacation, holiday spending, a new car, or other nice—to—haves with any additional money after you've covered all the essential savings bases.
By following this savings hierarchy, you'll be on your way to being a savings guru in no time.