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It's always a good idea to save money for emergencies and goals you're working toward. But your financial path won't be linear. There are times when a big event happens and savings will speed up, slow down or get reprioritized to account for it.
For example, if you just had a baby, you may redirect some of your savings to a college savings plan for your child. Or if retirement is coming soon, you may decide to save as much as your 401(k) allows this year.
Here's when it makes sense to reconsider your current savings strategy, and what to do with the money you set aside.
You've Had a Major Life Change
Big changes like getting married, getting divorced, having a baby or caring for an aging parent may require a shift in your savings plan. Here's how you can update your strategy:
- Set up a 529 plan. When you have a baby, it's already time to start thinking about paying for their college education. One way is to set aside a certain amount per month in a 529 plan, a type of investment account specifically for educational expenses. You can even set up a 529 plan for your child before they're born. There are two types of 529 plans: prepaid tuition plans for specific schools and education savings plans that can be used to pay for any college or graduate school. Make sure you're saving for your own retirement before prioritizing college savings.
- Strengthen individual savings before a divorce. During and after divorce, your own financial stability is paramount. Particularly if you didn't have a hefty savings account of your own during the marriage, save in a high-yield savings account leading up to the divorce so you have some financial flexibility after the marriage.
- Build a home improvement fund. If an elderly parent or another family member is moving in with you, you can save specifically for a home remodel or new furnishings. A high-yield savings account is a good choice for this. You could also consider a home equity loan or home equity line of credit (HELOC) to finance a remodel if you have good credit and interest rates are favorable.
Find High-Yield Savings Accounts
You're Approaching Retirement
As retirement nears, you're probably earning more than you were earlier in your career. If you therefore have more flexibility to prioritize saving, here are some options:
- Contribute the maximum to your 401(k). Say you're currently saving 10% of your income in your 401(k). If that doesn't add up to the $22,500 maximum yearly individual contribution (not including employer contributions) allowed by the IRS, bump up your monthly savings. Make use of a workplace match if you have one.
- Contribute the maximum to an individual retirement account (IRA). Additionally, you can save up to $6,500 per year in an IRA (or across several IRAs). The total contributions you can deduct from your taxable income, however, varies based on how much you earn. Consider saving in an IRA once your 401(k) is maxed out for the year. Opening up a Roth IRA in particular can also help you make use of different tax benefits from your 401(k).
- Take advantage of catch-up allowances. Both 401(k)s and IRAs let savers 50 and older save more per year to catch up on retirement contributions. In 2023, you can save an extra $7,500 per year in a 401(k) or other workplace retirement plan and an extra $1,000 per year in an IRA starting at age 50.
You're Considering a Career Change
Making a career shift—particularly if it means going back to school and cutting back on working hours—is an exciting decision that also requires some planning. To save up for school, basic expenses, other future goals or all of the above, try these strategies:
- Set up a 529 account for yourself. A 529 account isn't just available for babies or young kids; you can also open one to save for your own future education expenses. Since a 529 plan is an investment account, ideally you'll have at least some time to let your money grow—and you'll choose investments that are appropriate for your timeline. If you plan to go back to school in just a few years, for example, it's best to limit riskier investments, such as stocks.
- Make use of certificates of deposit (CDs). Another option is to save money in CDs, which provide a higher interest rate than a traditional savings account in exchange for locking away your money for a certain period of time. You can use a CD ladder to save in three separate CDs with maturity dates of one year, two years and three years, for example. You'll earn interest in each account and then use the money you've saved for schooling or expenses when you withdraw it each year.
- Limit 401(k) and IRA contributions. While saving for retirement is always important, at certain times it makes sense to decrease contributions and reallocate the money. During your career pivot, consider contributing only the amount your employer will match, if you're still working, or a reduced amount if you only have an IRA. Then save the rest you'd been putting towards retirement in a high-yield savings account so it's more easily accessible.
You're Considering Buying a House
Before buying a house, many would-be buyers decide to focus on saving up a down payment. Depending on the type of loan you choose, your credit score and how competitive your local market is, a down payment may need to be as much as 20% of the home's purchase price.
If you're a first-time homebuyer or your current home's sale won't cover the down payment you need on a new home, these options can give you a boost.
- Cut expenses to find more savings. Building a down payment fund can be a big lift, so look for ways you can increase the amount you save overall or per month. Every dollar helps. Cut subscription services you don't use; dial back your cellphone plan; finally sell the clothes, shoes and furniture you've been meaning to list on an online marketplace; or even rent out your car.
- Save in a CD. Say you know you want to buy a house in three years. Save a portion of your money in a three-year CD to capture a higher interest rate and to ensure your money will stay locked away for this purpose only. It's a good idea to have at least some savings more easily accessible in case you decide to buy a home sooner or an emergency expense arises.
- Use some savings for pre-sale repairs or renovations. If you're already a homeowner, certain home improvements are more likely to result in a higher sales price. A kitchen renovation, for example, or turning a formerly unfinished basement into a den, can be a wise use of savings.
Saving for Life's Big Milestones
It can be a time-consuming process to reallocate savings and learn about the different options available to meet your goals. But needing to change your savings strategy usually means something significant is happening in your life. If you can, recognize the shift in savings as a positive move, one that puts you on the path toward the future you want.