How to Juggle Multiple Savings Goals

Where to save first when you can't max out everything.

Dear Carrie,

I just started a new job, which offers benefits like a 401(k) and a Health Savings Account (HSA). I want to save as much as I can for the future, but I don't earn enough to max out all my savings accounts and make ends meet. How should I prioritize?

—A Reader

Dear Reader,

I'm excited to hear that you're serious about saving, and I agree it can be a little confusing to figure out how to divvy up those dollars when you have multiple financial needs competing for limited funds. Let's look at where to focus your efforts in five specific areas—and in what order.

No. 1: Capture your employer match

Always start by contributing enough to your 401(k) to get the full match from your employer, if offered. For example, if your employer matches your contributions up to 5% of your annual income, you should save at least that amount. If you don't, you're effectively leaving free money on the table. After all, a dollar-for-dollar 401(k) match by your employer is equivalent to a 100% return on your contribution.

You can contribute more than that, of course—in 2022, the limit is $20,500 (plus another $6,500 if you're 50 or older)—and you'll probably need to save more to reach your retirement goal. But before you put more into your 401(k), you should probably make sure a few other areas of your finances are in solid shape.

No. 2: Pay down high-interest debt

Carrying large amounts of credit card or other high-interest debt can get in the way of making meaningful progress toward your savings goals. Indeed, by paying down credit cards—which charge an average annual interest rate of roughly 17%1—you could easily end up saving more on interest charges than you'd earn in the markets. Having to spend less on debt each month also gives you more room to save.

No. 3: Build up your emergency fund

I'm troubled by a recent report that suggests two in five Americans would struggle to come up with just $400 to cover an emergency expense.2

Try to save up enough to cover at least three to six months' worth of essential expenses—food, housing, utilities, etc.—and keep the money in a high-interest savings or money market account so you can access it within a business day, if needed. An emergency fund can also allow you to continue saving and avoid taking on new debt to cover your expenses should the unexpected happen.

No. 4: Consider other tax-advantaged accounts

Once you've addressed the previous three items, it's time to look at your HSA. These accounts, which are generally available to employees who participate in high-deductible health plans, offer several great features. And the higher your tax bracket, the more beneficial HSAs can be.

First off, contributions are federally tax-deductible; capital gains, dividends, and interest accumulate tax-free; and you pay no tax on withdrawals for qualified medical expenses. Given the substantial cost of health care in retirement, these tax advantages are a huge benefit for retirees. What's more, HSA withdrawals used for any other purpose beginning at age 65 will be taxed as ordinary income, putting them on the same footing as withdrawals from a 401(k) or an IRA account.

Some employers will contribute to an HSA on your behalf, which may make it easier for you to reach the annual maximum of $3,650 per individual or $7,300 per family in 2022, inclusive of whatever your employer pitches in. (Employees age 55 and older can save an additional $1,000.)

No. 5: Save even more toward your goals

If you have more cash to put to work after contributing to your HSA (or aren't eligible for one), revisit your retirement accounts to see how you can save even more.

Of course, retirement is unlikely to be your only financial goal, which is why it's important to balance short- and long-term savings. You don't have to save every extra dollar for retirement so long as you're saving enough. A general guideline is to save 10% to 15% of your salary (including any employer match) starting in your 20s. (Add 10% to each of those figures for every decade you delay saving for retirement, so 20% to 25% in your 30s and so on.) Once you feel you're on track to reach retirement, you can then turn to your other goals.

In short, I think it's safe to say that most people can't max out all their savings goals all the time. The important thing is to save what you can, when you can, in the order that makes the most sense for you.

Have a personal finance question? Email us at Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

1Consumer Credit, November 2019, Federal Reserve, 01/08/2020 | 2Report on the Economic Well-Being of U.S. Households in 2017, Federal Reserve, 05/2018

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