Cash Savings vs. Retirement Savings – What’s More Important?

Should your focus be putting money into savings or investing in retirement? How much should you have in each? Maximize your returns with these tips!
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Saving and investing are two different ways to prepare for the future. In my opinion, the difference between saving and investing boils down to risk tolerance and time frame.

Generally, savings should be used for short-term planning and investing for long-term planning.

Strong financial planning calls for a mixture of saving and investing, and today’s question concerns how to balance cash savings and investing for retirement.

Table of Contents
  1. Cash Savings vs. Retirement Savings
  2. Where Should You Focus?
  3. Goal 1: Increase Retirement Savings
    1. 401k vs. Roth IRA
    2. How You Can Contribute To An IRA
    3. Vanguard Funds
  4. Goal 2: Increase Cash Savings
    1. Cash Savings
  5. How You Can Meet Both Financial Goals
    1. Save For Retirement and Cash Goals
    2. It’s OK For Your Goals and Situation to Change
    3. Determine How Much Cash You Need, Then Invest the Rest
  6. Where to Store Cash Savings
    1. Online High-Yield Savings Accounts
    2. CDs
    3. Money Market Account
    4. Treasuries
  7. Where to Invest Retirement Savings
    1. Types of Retirement Accounts
    2. Retirement Investment Options

Cash Savings vs. Retirement Savings

Q: Hello, Ryan. I have a question for you about cash savings vs. retirement savings.

I visited a financial planner a few weeks ago because my office offered a service to go visit one for free. I sat down and gave her a sketch of our finances:

  • Take home pay: $8100/mo (after taxes and 401(k) contributions)
  • Savings: $23,000 (5 mos living expenses)
  • Retirement: $75,000
  • Mortgage: $270,000 @ 5.6%
  • Student Loans: $14,000 @3.5% and $42,000 @ 2.5%

We have no other debts and are able to save about $1500/mo right now. I’m 29 and my husband is 33. We both work for the government and have stable jobs.

One major financial goal is to increase our retirement savings. I think we got off to a slow start and we’re trying to catch up now. Another goal is to increase our cash savings since we live in a small condo and might have kids in the future (next 2-4 years most likely). We would likely have to move and might even need to add a car if we had a kid.

The financial planner advised us to decrease our 401(k) contributions to 5% in order to get the full employer match and then put the money saved in a Roth. Our income would increase by about $700/mo if we do this. My concerns are:

  1. Our money won’t go as far since it will be after tax, so our retirement contributions for the year will go down.
  2. If we do the Roth, I’d like to put our money in Vanguard Lifecycle Funds, but you have to put in $3,000 to open an account ($6,000 for both of us). That’s a lot of money that we’re putting into the market all at once. I’d rather spread our risk by spacing out the contributions but it doesn’t seem to be an option with Vanguard.
  3. I’m not sure opening a Roth is even the right thing to do. I know it has great advantages in the long term, but maybe we should do that another time…

Should someone in our situation just try to amass as much cash as possible? Or should we focus on paying down our student loans instead?

I know that I’m not getting professional advice here, but I’m curious as to what everyone’s opinion is… I don’t really talk about finances with my friends so it would be nice to bounce this off of some other people. Thanks for your consideration!


Where Should You Focus?

A: Hi Penelope, thanks for contacting us. I’ll start off by saying you’ve done a good job so far by making smart financial decisions and not amassing any consumer debt.

With some additional planning, you should be in a nice position to meet your goals of increasing your retirement and cash savings.

Let’s look at a couple of options and hear the opinions of two other members.

As you mentioned, we are not professional financial advisors, so this is just a look at your options, not advice telling you what to do! I recommend visiting a fee-only financial planner for more specific information.

Goal 1: Increase Retirement Savings

If you got a late start on your retirement investing, you’ll likely want to catch up as much as you can while you and your husband are in your prime earning years and don’t have any children or other major expenses.

401k vs. Roth IRA

Roth IRAs are a great deal, and I recommend opening a Roth IRA if you fall within the income limits. It’s important to understand their advantages.

Take some time to read about and understand the differences between TSP plans and IRAs.

For many people, investing for the 401k match is better than working toward maxing out your Roth IRA because of the long-term tax benefits that Roth accounts offer.

Investing in both a Roth IRA and a 401k helps diversify your taxes in your retirement years. Here are some more tips about maximizing your 401k plan contributions.

How You Can Contribute To An IRA

Each person can contribute up to $7,000 to an IRA, and there are several ways to max out an IRA if you choose to (or contribute any amount up to the max). Decreasing your 401k contributions is one way.

You can also use some of the $1,500 cash savings you accumulate monthly. Suppose you want to make the contributions all at once. In that case, you can use a portion of your emergency fund to fund your IRA partially, then set up automatic investments using dollar cost averaging to max out your IRA over the year.

It would take $458.33/mo. per person ($916.66/mo. for both people) to max out an IRA with monthly contributions. You can repay your emergency fund over the next few months.

I don’t normally recommend people use their emergency funds to invest, but you can probably afford to do this as you and your husband both have stable jobs. Your excess cash flow should make it relatively easy to build your emergency fund back up over just a couple of months.

Vanguard Funds

Don’t let the $3000 minimum stop you from investing in the Vanguard Lifecycle funds if that is the plan you wish to invest in. You have a substantial emergency fund and stable jobs, so you could afford to invest the $3,000 or $6,000 and then repay your emergency fund over the next couple of months.

Alternatively, you could save each month until you reach the $3,000 required to open a fund. I don’t think making a $3,000 or $6,000 initial investment instead of monthly installments will hurt you over the long run.

Many studies show that lump sum investing outperforms dollar cost averaging in the long run. So, making a large lump sum investment is a good idea.

Goal 2: Increase Cash Savings

Cash Savings

My wife and I just had our first child, and we are in a similar position as you imagine you and your husband might find yourselves. We are looking at needing to upgrade a vehicle in the next few months and move out of our condo in the next year.

We started saving for this about 2 years ago, and we are glad we did – there will be a lot of unexpected expenses along the way! Starting early is the right way to go.

To meet your cash savings goals, determine your needs: what size car, housing needs, stay-at-home mom or working mom, etc. It’s tough to answer these questions because the answers are unknown until you get there, so do the best you can, knowing that things may change in the future.

If it makes you feel better, err on the side of caution and save a little extra cash. You may also start looking for other savings methods to increase your monthly savings (eating out less often, dropping premium cable services, etc.).

These questions can help you determine your comfort level regarding how much cash you need to keep in your emergency fund.

How You Can Meet Both Financial Goals

Save For Retirement and Cash Goals

Your current salaries allow you to save $1,500 per month, so you can continue your current 401k allotments, fully fund your IRA, and stick the remainder in your cash savings.

You may find it helpful to earmark your savings for specific goals so you can track progress as you save. For example, Capital One 360 offers sub-accounts, which makes it easy to direct your savings toward specific goals.

It’s OK For Your Goals and Situation to Change

If you ever need to increase your cash savings, you can decrease your 401k or IRA contributions and then direct the remaining amount toward cash savings.

Or you can contribute in any combination in between. Do whichever arrangement makes the most sense for your needs.

In the meantime, you can maintain higher cash flow if you remain in your current house and drive the same cars until you need to upgrade if you have children.

Remember, having a smaller home is more affordable than upgrading before you are ready or need it. Lowering your expenses will give you more financial flexibility and help you meet your financial goals better.

Determine How Much Cash You Need, Then Invest the Rest

It’s good to keep some cash liquid. This is important for your emergency fund and paying for any short-term needs. But to make money, you must invest it, not keep it in a savings account.

Even the best online savings accounts only offer a little over 1% interest. That’s fine for the money you might need quick access to (your emergency fund), but it won’t make you a millionaire or help you grow your wealth.

Where to Store Cash Savings

With savings and investment goals in mind, you must determine the best place to put your funds.

Let’s examine some of the best places to store cash savings.

Online High-Yield Savings Accounts

While traditional savings accounts are a safe bet, you won’t be garnering the interest you could with an online account.

Because online banks don’t have brick-and-mortar establishments to fund, they charge lower fees and pay higher interest rates.

The top online high-interest savings accounts offer high returns, little to no fees, and functionality. Many of those accounts come with mobile banking features, allotted numbers of transfers, access to the banks’ ATMs, and customer support.

If you’re looking to safely store your savings without the risk that often accompanies investments but still get a solid return and easy access to your funds, a high-yield savings account is your top choice.


Certificates of deposit are another low-risk, short-term savings option that you might want to consider.

CDs are locked in for a set period, such as six months, one, two, three, or five years. The only catch with a CD is that your money has to stay there until the account reaches maturity at the end of its term.

The best places to open your next CD are typically online banks, but credit unions and traditional banks also offer decent CD rates.

To make even more money with your certificates of deposit, I recommend a strategy of CD laddering.

Laddering your CDs allows you to access some of your money and earn a higher profit on interest. With a 5-year CD ladder, you invest in a 1, 2,3,4, and 5-year CD, meaning you’re never more than a year away from getting your savings.

Although CDs don’t have as high a potential return as other investments, they’re a good option if your main goal is safely stashing your funds. CDs have a better return than a traditional cash savings account, allowing you to dip your toes into strategic investment.

Money Market Account

A money market account gives you the best of both the checking and savings worlds.

Money markets, like CDs and high-yield accounts, have better interest than traditional savings accounts, and you can access your funds when needed. Most banks offer money market accounts, and you can even write some checks from those accounts.

To maintain high interest rates, money market accounts have higher minimum balances than other savings accounts. They also invest in low-risk ventures like government securities and commercial paper.


You can’t get much safer in the investment world than purchasing a treasury bill or note.

You might consider a treasury to accrue some interest on your savings without risking it all.

Treasuries aren’t taxable at the local or state level; they’re backed by the full faith and credit of the United States government, and they come in the form of bills or notes. A note, for instance, is purchased at a term with a set interest amassing every six months.

On the other hand, a bill is purchased at a discount, and you receive it at face value once it matures.

Where to Invest Retirement Savings

Regarding retirement savings, the stakes differ from those with short-term savings options.

Where you place your retirement savings depends on your goals and your comfort with taking risks.

Types of Retirement Accounts

401 (k)

Most people start here, enrolling in a 401 (k) or 403 (b) account with their employer. If you change jobs, your account can be rolled over to your place of employment or your IRA.

Traditional IRA

If you’re under age 50, your Roth and IRA contributions are capped at $5500, and $6500 above age 50. A traditional IRA’s growth is tax-free.

Simple IRA

Simple IRAs are perfect for small companies with fewer than 100 employees. A simple IRA allows you to contribute and be matched by your employer at a certain percentage.


Ideal for self-employed individuals, a simplified employer pension is easy to set up and allows you to contribute 25% of your income or $55,000, whichever is less.

Roth IRA

I’ve written extensively about Roth IRAs and where to open them. The Roth should be your next line of retirement investing after maxing out your 401k.

Roth IRA funds are pre-taxed and contributions can be accessed without penalty.

Retirement Investment Options

Within those accounts, you need to decide how your money is invested. Here are a few tips to keep as you determine how much risk to take with your retirement investment portfolio.

Consider a small-cap stock if you’re young and have zero aversion to risk. They’re risky, but the returns could be huge.

You could benefit greatly if you do your research and insert a few carefully chosen stocks into your portfolio. You might also consider an option like an ETF or mutual fund investment.

The closer you get to retirement, the more you have to risk.

The more money you risk, the more caution you might want to apply to your investments. Bonds and blue-chip stocks are great options, much safer than small-cap stocks but still highly rewarding.

As you near retirement, take advantage of the increased contribution limit and put as much as possible into your retirement accounts.

You can easily retire with a diverse portfolio, measured risks, and defined goals.

You have many options, so please decide which actions are best for your needs. You may also consider consulting with a financial planner for more information.

Best of luck!

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  1. Timothy says

    There is a lot of great information here.
    My take on the original Question is this:
    – Never miss the 401k match, its free money.!
    – Traditional 401k contributions can offset taxable income for high earners when your Tax Bracket can be quite high.
    – You might choose to split your savable amount monthly (Example:)
    $400to Traditional 401k
    (Tax Benefits now and reduced taxes in Retirement)

    $300 to Roth in your 401k
    $300 to Roth Bank IRA
    (After Tax dollars and interest compound Tax Free)

    $500 to Bank Money Market and/or Short term CDs
    (Allows for a cash reserve buffer and child expenses as needed “when the time comes”)

    The power of compounding (Especially with Roth) can be substantial for investors that begin early.

    This method allows for diversification and achieves long term returns that will provide security and measurable returns over time.

  2. Paul says

    You mentioned you work for the Government, I’m assuming it is the Federal Government. If so, you do not need to open an IRA\Roth IRA. The TSP (Government 401k) has a Roth component where you can put funds. Put the maximum of 18,500 (2018 amount) into the TSP\Roth-TSP.

  3. Suzanne Pfeiffer says

    Aside for where to invest, your mortgage borrowing costs are way too high. 5.6% for a mortgage, should be closer to 3.75%. Please contact either a mortgage broker, or contact a few banks to shop around for a lower rate. You should be able to cut it by 2% or so, and that will lower your monthly costs by several hundred $$. If you can afford it, you can also opt for a 15 year mortgage refinance, so that the rate will be even lower.

  4. Tom says

    I believe you can always withdraw principal from Roth accounts, so it’s not any different than a taxable account, other than you don’t pay capital gains tax and you are limited to $5k per year contribution. But you want to make Roth contributions while you don’t exceed the income limits.


    • Ryan says

      Tom, you can withdraw your Roth IRA contributions, but you can’t put them back, so doing this will significantly hinder your investment’s growth potential. Here is more info about Roth IRA Withdrawal Rules.

      That said, a Roth IRA is very different from a taxable account. Roth IRAs are made with contributions which have already been taxed, and you won’t be taxed on the qualified withdrawals you make in retirement age. This is not the case for taxable accounts, which are taxed any time you sell them, cash them in, or receive dividends or other income from them. There is a huge long term tax advantage advantage with Roth IRAs compared to taxable accounts.

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