Going into a new year, it’s important to review your savings rate to ensure that it will allow you to fund your short and long-term goals. As a general rule of thumb, 10-15% of your gross income should be directed towards long-term savings. While reviewing your savings rate, make sure to take a look to see if you’re contributing to Roth or pre-tax retirement accounts. Pre-tax accounts will allow you a tax deduction the year that you make the contribution, but the funds will be taxable when distributed. Roth accounts don’t allow a tax deduction the year that contributions are made, but the funds can be distributed tax-free down the road.
It’s also a best practice to review your short-term emergency savings to ensure that it’s adequately funded. Most households need an emergency fund that covers 3-6 months of their typical household expenses, plus enough cash on hand to cover major purchases that are planned.
