12/10/2021
There is no shortage of places to send your savings and oftentimes, the endless amount of options can cause confusion! Welcome to the savings waterfall, the top places you need to cover with your savings in order of importance:
1.) Build Emergency Fund: An emergency fund is savings that you’ve set aside for one purpose: to cover unexpected bills. For most people, building an emergency fund should be their first financial priority.
2.) Max 401(k) Match: If your employer offers matching contributions in your 401(k) plan, then you should consider contributing enough to maximize these contributions. This is free money that will help you reach your long-term retirement saving goal.
3.) Pay Off High-interest Debt: Simply put, loans with higher interest rates cost more money. A large loan balance with a high rate should be your top target if you’re trying to attack your debt load.
4.) Fund your HSA: Health savings accounts (HSAs) up the ante on traditional retirement-saving vehicles. They combine the upfront tax deductibility of Traditional IRAs with the tax-free withdrawals of Roth IRAs, along with their non-taxable investment earnings for good measure. That’s a triple tax benefit. Only healthcare outlays qualify for the triple tax benefit and you must have a high-deductible health plan to contribute.
5.) Fund a Roth IRA/Trad. IRA: Retirement-focused accounts are the most popular types of qualified accounts. Traditional IRAs allow you to contribute toward your retirement savings with after-tax income and then claim a tax deduction for the contribution amount. Roth IRAs allow you to contribute toward your retirement savings with after-tax income that can be invested without incurring taxable gains. Which one you contribute to will depend on your current and projected tax situation.
6.) Max Out Your 401(k): 401(k) plans allow employees to invest pre-tax savings toward retirement in mutual funds.
7.) Contribute To After-tax Savings: Once you have filled the other buckets, you can begin to create a savings plan with your after-tax dollar.
Savings for a child’s education and a down-payment on a home should be viewed as separate items warranting their own plan.
