06/17/2013 01:56 pm ET Updated Aug 17, 2013

What Should I Save for First?

According to the latest government figures, the U.S. personal savings rate is running below 3% - which is less than half historical averages.* Most people know they should be saving more, but with so many competing priorities, it's hard to figure out where to start.

For example, should you save first for a home, or for your children's education? And how do you choose between paying off a credit card and building a retirement nest egg? Monthly bills, unexpected emergencies and the occasional splurge can all make a dent in our progress toward saving for long term goals.

It's easy to feel overwhelmed by these choices, which is why prioritizing your goals can make them feel less daunting. At Schwab, we have developed eight savings fundamentals -- simple steps designed to help you understand how your savings can have the most impact on your overall financial well-being. I recommend tackling them one at a time and in the right order, which is critical.

  • First step: Make sure you're taking advantage of your company's retirement plan by saving at least enough to receive the full employer match. Many employers will match some or even all of your contributions. Essentially, this is free money. Plus, most 401(k) contributions are deducted from your income before it's taxed, so you can effectively keep more of your earnings: another added benefit.
  • Next, pay off any credit cards and other high-interest debt. Paying off your debt will make it much easier to reach your savings goals. Just think--if you no longer have to pay the high rate you owe on debt, you'll be able to apply those savings to other things.
  • Third, keep yourself covered in case of an emergency. Tuck away enough money to cover at least three to six months of essential living expenses. This is especially true in a shaky economy, when a job loss or unexpected costs can hit fast and hard.
  • Number four. Contribute the maximum amount to a tax-deferred retirement account, like an IRA or 401(k), which can allow your money to grow even further. Now more than ever, you're responsible for your own retirement, so helping to secure your financial future is a major priority. The more you set aside, the more secure your retirement may be.
Once you've accomplished these savings goals, you should move on to other priorities, which can include saving for your children's education, saving for a down payment on a new home, paying off a mortgage or opening up a brokerage account.

Using a solid savings strategy will help build and grow your next egg. It should also give you greater confidence, knowing that you're taking action to ensure your savings goals are within reach.

*Personal Savings in the United States is reported by the U.S. Bureau of Economic Analysis (BEA). Personal Savings in the United States remained unchanged at 2.70 percent in March of 2013 from 2.70 percent in February of 2013. Historically, from 1959 until 2013, the United States Personal Saving Rate averaged 6.87 Percent reaching an all time high of 14.60 Percent in May of 1975 and a record low of 0.80 Percent in April of 2005. In the United States, Personal Saving Rate correspond to the ratio of personal income saved to personal net disposable income during a certain period of time.

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