Ask Carrie by Carrie Schwab Pomerantz

When we teach our children "Save your money," we're trying to engrain a habit that we know will serve them well when they're adults. A couple of hundred years ago, a propensity to save was considered a testament to one's moral fiber, but today, a propensity to save is a necessity. Saving gives you resources to deal with crises (from an illness or lost job to a downturn in the stock market) and — most important — to build wealth for your long-term goals.

With kids, saving might be oriented to something specific: a new iPod, a cellphone or a used car. Adults have different goals — usually many goals — and the challenge is how to prioritize them. Should you pay off a credit card or buy some shares in a stock? Invest for retirement or save for your child's education?

The thoughtful people at the Schwab Center for Financial Research (a division of Charles Schwab & Co., Inc.) set out to answer these questions rigorously, and they recently published their conclusions in the form of eight "savings fundamentals." Designed to make your saving decisions more intelligent, these guidelines can help you take the maximum advantage of your company's retirement benefits as well as existing tax breaks and interest rates:

Take full advantage of your company's match: If you participate in a 401(k) or similar plan at work and your employer offers a match, priority No. 1 is to contribute enough to get the full benefit. So if your company is willing, for example, to match 50 percent up to the first 3 percent of your salary that you contribute, you should strive to get every penny. Don't leave this money on the table unless it's absolutely necessary.

Pay off credit card debt: Priority No. 2 should be to eliminate high-interest, nondeductible debt — in other words, credit card debt. Credit card rates vary, of course, but the national average is over 11 percent. Getting rid of that debt is an easy and powerful way to generate money for other goals. (If you have access to a home equity line of credit, you might use it to pay off your cards. Realize, though, that even though you may get a lower rate — and the interest may be deductible — you're not really reducing your overall debt.)

Save for the proverbial rainy day. You're getting the maximum from your company match, and you've paid off your credit cards. What next? Put three to six months of living expenses into a safe, liquid account. Your checking account is perfectly safe, but an online bank account or money market account might give you a bit more interest.

Some people use a home equity line of credit as their emergency fund, but this can be a risky proposition — especially if you ever find yourself out of work.

Max out your retirement savings possibilities. Your next priority should be to step up your retirement investment program. Contribute the maximum to tax-advantaged retirement accounts: 401(k) or equivalent plans, traditional IRAs or Roth IRAs (and don't forget the annual catch-up contributions if you're 50 or older). (If you're not sure which plan is right for you, talk to a retirement planner.)

Save money for college if you have children. If you're this far along in the priority list, you're doing a great job: no credit card debt, an emergency fund and aggressively saving for retirement. Your next goal could be to save for a child's higher education using the 529 plan or the Coverdell Education Savings Accounts. Both are tax-advantaged, which makes your investment potentially go further, and if you start when the kids are young, you may be able to put quite a dent in the high cost of college education (an investment in their futures).

Save for a home. A home of one's own has long been part of the American Dream, though the events of the last 16 months may have tarnished that a bit. But if you want to own a home, saving for the down payment could be the next goal. Notice how far down the list it is, though; in the personal finance scheme of things, it's generally not considered as high a priority as retirement (or quite possibly college).

Pay down your mortgage. If you're making progress on all these other fronts and you still have money for savings, consider paying down your mortgage debt or home equity line of credit. Yes, these generally have lower rates than credit card debts, and yes, the interest may typically be tax-deductible. But it's still debt, and that means it costs you something. Paying it down will cost you less.

Finally, keep investing. Got more money? Then keep on investing in a good old-fashioned taxable account in a diversified, properly allocated portfolio that reflects your tolerance for risk and your long-term goals. You may feel it's "safer" to keep your money in the bank, but you need the potential growth of the financial markets to overcome the ravaging effects of inflation. Investing is how you "save" for the long term.

What I like best about this hierarchical approach is how it helps you make decisions. Most people know that saving for the future is good, but with so much to save for and so many opportunities, it can be a real challenge to decide what to do next. This framework can help you with those tough decisions, helping you to maximize every dollar.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can e-mail Carrie at askcarrie@schwab.com. To find out more about Carrie Schwab Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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