Here’s the ‘Optimal Order’ for Saving and Investing Your Money
Written by
Sean Fisher, AI Editor
Edited by
Sean Fisher
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Saving and investing are essential components of a solid financial plan. However, the order in which you allocate your money to different financial goals can significantly impact your overall wealth and financial security.
Here’s our suggested ‘optimal order’ for saving and investing your money.
1. Build an Emergency Fund
Before investing or paying down debt, prioritize establishing an emergency fund to cover unexpected expenses. A good rule of thumb is to have three to six months’ worth of living expenses saved in a high-yield savings account. This cushion can help you avoid high-interest debt and provide peace of mind in case of job loss, medical expenses, or other emergencies.
2. Contribute to Employer-Sponsored Retirement Accounts
If your employer offers a 401(k), 403(b), or similar retirement plan with a matching contribution, take advantage of it. Contribute at least enough to receive the full employer match, as this is essentially “free money” for your retirement.
3. Pay Off High-Interest Debt
After securing your employer match, focus on paying off high-interest debt, such as credit card balances. The interest on these debts can quickly erode your financial progress, so it’s crucial to eliminate them as soon as possible.
4. Contribute to a Health Savings Account (HSA) or Flexible Spending Account (FSA)
If you have a high-deductible health plan, consider contributing to an HSA. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. An FSA can also provide tax benefits for medical expenses, but funds must be used within the plan year.
5. Maximize Individual Retirement Accounts (IRA)
Once high-interest debt is paid off, consider maximizing contributions to an IRA (Traditional or Roth), which offers additional tax benefits for retirement savings. In 2023, the maximum contribution is $6,000 per year ($7,000 if you’re 50 or older).
6. Invest in a Taxable Brokerage Account
After maximizing tax-advantaged retirement accounts, consider investing in a taxable brokerage account. While these accounts don’t offer tax benefits on contributions or withdrawals, they provide flexibility to access funds before retirement without penalties.
7. Save for Short-Term Goals
Set aside money for short-term goals, such as vacations, home improvements, or purchasing a car. Use high-yield savings accounts, CDs, or money market accounts for these goals to earn some interest without risking principal loss.
8. Pay Off Low-Interest Debt
While low-interest debt (such as student loans or mortgages) may not be as urgent as high-interest debt, paying it off can free up cash flow for other financial goals.
9. Contribute to a 529 Plan or Education Savings Account
If you have children or plan to support a loved one’s education, consider contributing to a 529 plan or Education Savings Account (ESA). These accounts offer tax benefits for saving and investing for qualified education expenses.
10. Invest in Real Estate or Other Alternative Investments
Diversify your investment portfolio by considering real estate or other alternative investments, such as peer-to-peer lending or crowdfunding platforms. These investments may offer additional income streams and diversification benefits.
The optimal order for saving and investing will vary depending on your individual financial situation, goals, and risk tolerance. It’s essential to consult with a financial advisor to tailor a strategy that suits your specific needs and circumstances.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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