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What is the retirement savings waterfall?

3 mins read
by Unbiased Team
Last updated Monday, December 11, 2023

The retirement savings waterfall is a financial planning technique that allows you to prioritise different financial goals by allocating money into different ‘buckets’ based on what you want to achieve.

Originating in the US but just as applicable to UK savers, a savings waterfall refers to a systematic approach to managing your savings and allocating your funds in a specific order or priority.

It involves dividing your savings into different categories or 'buckets' based on their purpose or timescale.  

The concept of a savings waterfall should help you prioritise your savings and allocate your money towards hitting your financial goals.  

How to create a savings waterfall 

Your ideal ‘waterfall’ will look entirely different depending on your financial goals and personal circumstances.

However, the elements shown in the framework that follows will apply to the majority of people looking to make the most of their savings and investments: 

1. Create an emergency fund 

The priority in a savings waterfall is typically to establish an emergency fund.

This fund is meant to cover unexpected expenses or financial emergencies, such as medical bills or job loss.

It is recommended to save three to six months' worth of living expenses in an easily accessible account, like a high-yield savings account. 

2. Pay off debts 

Your debts are the hole in the bucket. This is because the interest on your debts is likely to be greater than the yield returned from any savings and investments.

There is little point in diverting funds towards for example a savings account with a 4 per cent rate of interest, if your debt has a 7 per cent interest rate. Pay off the debt first. 

3. Agree short-term financial goals 

Once you have established your emergency fund and paying off debts, the next step is to save for short-term goals that you plan to achieve within the next one to three years.

These goals might include saving for a holiday, purchasing a new vehicle, or making a down payment on a house.

Allocate funds to a separate savings account or investment that matches the timescale and risk tolerance for these goals – an easy-access cash ISA for example. 

4. Set medium-term goals 

After addressing short-term goals, you can focus on saving for medium-term goals that you plan to achieve in three to ten years.

These goals may include saving for a wedding, home renovations, or starting a business.

Consider using savings accounts or investments that offer a balance of growth potential and liquidity. 

5. Look ahead to long-term goals 

The next step in the savings waterfall is to allocate funds towards long-term goals, such as retirement savings.

It's important to contribute regularly to retirement accounts, such as a workplace pension to ensure long-term financial security.

Take advantage of any employer matching contributions or tax advantages available with retirement accounts. 

6. Make additional investments 

Once you’ve addressed your emergency fund, short-term, medium-term, and long-term goals, you can consider allocating additional savings towards other investment opportunities.

This may include investing in stocks and shares, bonds, property development, or other asset classes based on your risk tolerance and investment knowledge. 

By following a savings waterfall approach, you prioritise your savings goals and ensure that you allocate your funds in a way that aligns with your financial goals.

It's also important to regularly review and adjust your savings strategy, as your goals and circumstances evolve over time. 

Unbiased can match you with the right financial adviser for your personal situation and individual financial goals – get in touch to find an expert.

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Unbiased Team
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.