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The Difference Between Short Term Savings Vs. Retirement
Other than paying off your debt, the smartest financial decision you can make is to start saving your money. It may seem difficult, even impossible at times, but even a little contribution will become helpful in the future. Savings could allow you to fix your vehicle so you can get to work, or even set you up for retirement. But deciding on where to put your savings can be extremely overwhelming.
If you know how to save for the near future (emergency fund) and save for further down the road (retirement), then you can rest assured you’ll have a healthier, happier financial life.
The difference between savings and retirement is based on how soon you may need to access the savings. Your savings account is usually where you put money away for planned needs like a vehicle or for emergencies. It’s important to budget for your savings and stick to it; because one day, you’ll need it.
Funding your retirement gets a little more complicated. There are several types of retirement funds, but the most common are Roth, IRA, 401K or an investment account. Understanding the differences among these will help you make the informed financial decisions that will ensure you’ll have a comfortable retirement.
Most people will budget a certain percentage of their income to save and transfer it into their savings and retirement accounts. The most common savings types are:
- Emergency Fund
- Savings for Major Purchases & Retirement
An emergency fund is the first and foremost reason to save. Start placing money in this account before saving for any large purchases. You never know when you’ll need money for an emergency auto repair, a trip to the doctor, or an unexpected fine. An emergency savings works to shield you against the unexpected and will keep you safe from overdrafting or falling deep into debt.
Once you’ve built an adequate emergency savings, usually 3 to 6 months of income, you can start saving for large purchases for your future and your retirement. When it comes to vehicles, furniture, or even a down payment on a new home, the more you save, the less you’ll have to borrow.
One day, you’ll want to retire and live out your golden years comfortably. It’s never too early or too late to start contributing to a retirement fund. There are several types of retirement funds, but the most common are IRA, Roth IRA, and 401K.
This plan is the easiest for most people saving for retirement because it’s usually deducted directly from your paycheck before taxes. Some companies will offer other benefits like matching your contribution. If you leave a company, you can roll over your 401K to your next job or your own IRA.
When you contribute to an IRA, the money can grow tax free. You’re allowed to contribute up to $5,500 a year into an IRA that will grow as you age. IRAs are especially helpful if your company doesn’t offer traditional retirement plans. The downside is that if you need to withdraw your IRA before the age of 70, you will have to pay a penalty fee based on the amount you’re withdrawing.
A Roth IRA is much like an IRA, but with two chief differences:
With Roth, your contributions are after-tax dollars, and you don’t have to pay a penalty if you need to withdraw early. The contributions do grow tax-free like an IRA but the amount you can contribute is limited.
How To Plan for Your Financial Future Today
Planning your savings for the short and longer term can seem overwhelming when your current debt situation is unmanageable. At CreditGUARD, our certified credit counselors can help you get on the right track with financial education and debt management. Call CreditGUARD Today!