Balancing 401(k) Contributions with Other Financial Goals: 10 Tips
When planning for retirement, one of the most common recommendations is to contribute to your 401(k). It’s sound advice, but balancing your 401(k) contributions with other financial goals can sometimes be challenging. Striking this balance is important to help prepare for retirement without neglecting other aspects of your financial life. Here are 10 tips to help you navigate this balancing act.
1. Assess Your Financial Picture
The first step in balancing 401(k) contributions with other financial goals is to get a clear picture of your overall financial situation. This includes your income, expenses, savings, investments, and debts.
A comprehensive understanding of your financial landscape allows you to make informed decisions about how much to allocate to your 401(k) and other financial priorities.
2. Set Clear Goals
Identify and prioritize your financial goals. These might include paying off debt, saving for your children’s education, building an emergency fund, or buying a vacation home.
Clearly defining your goals helps you determine how much you need to save for each objective and over what time frame. This clarity will guide your decisions on how to balance your contributions.
3. Maximize Employer Contributions
If your employer offers a 401(k) match, try to contribute enough to get the full match. This is essentially free money and can significantly boost your retirement savings. Prioritizing your contributions up to the employer match should be one of your first steps before addressing other financial goals.
If you’re able, consider contributing the maximum allowable amount. For 2024, the contribution limit for a 401(k) is $23,000, with an additional catch-up contribution limit of $7,500 if you’re age 50 or over.
4. Create a Balanced Budget
Your budget should reflect your financial goals and obligations. Make sure your budget includes regular contributions to your 401(k) while allocating funds toward other savings and investment accounts. This balanced approach helps you work toward multiple goals simultaneously without neglecting your retirement savings.
5. Build an Emergency Fund
We believe everyone should have an emergency fund to act as a financial safety net, allowing you to handle unexpected expenses without derailing your retirement savings or accumulating high-interest debt.
Aim to save three to six months of living expenses in a liquid, easily accessible account.
6. Pay Down High-Interest Debt
High-interest debt, such as credit card debt, can significantly hinder your financial progress. Prioritize paying off high-interest debt to free up more money for savings and investments.
While it’s important to contribute to your 401(k), paying down high-interest debt can sometimes take precedence, as the interest on these debts often exceeds the returns you might earn from your 401(k). Talk with your financial advisor if you’re unsure which step to focus on first.
7. Consider Other Retirement Accounts
Diversify your retirement savings by considering other retirement accounts like IRAs, Roth IRAs, and brokerage accounts. These accounts offer different tax advantages and can complement your 401(k).
Contributing to multiple types of retirement accounts can provide more flexibility and tax benefits in retirement.
8. Review and Adjust Regularly
Life circumstances and financial markets change, so it’s important to regularly review and adjust your financial plan. Reassess your 401(k) contributions and other financial goals at least annually or whenever you experience a significant life event, such as a job change, marriage, or the birth of a grandchild.
Regular reviews can help you feel confident that your plan remains aligned with your situation and long-term goals.
9. Work with a Financial Advisor
Balancing 401(k) contributions with other financial goals can be complex, and you don’t have to do it alone. Working with a fiduciary, fee-only financial advisor can provide valuable insights and guidance tailored to your situation.
At Parkshore Wealth Management, we help clients make informed decisions about balancing their 401(k) contributions with other priorities as part of our ongoing financial planning and investment management.
10. Stay Focused on the Long Term
Finally, maintain a long-term perspective. It can be tempting to reduce retirement contributions to meet immediate financial needs, but remember that your future self will benefit from the consistent and disciplined saving habits you establish today.
Balancing short-term needs with long-term goals is key to a comfortable retirement.
Final Thoughts
Finding the right balance between 401(k) contributions and other financial goals requires careful planning and regular reassessment. By following these tips, you can help stay on track. Whether you’re looking to optimize your savings strategy or need help meeting your financial priorities, consider partnering with a financial advisor to help achieve your goals.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.