Putting Money in Order

If given a choice, which would you choose? Freedom or frustration?

I know it seems like a ridiculous question. But, over the years, I can see where I often chose frustration over freedom when I chose what to do with my hard-earned cash. It wasn’t on purpose, of course. It’s just that I had some things out of order.

I tried to buy or invest my way to freedom before I had paid for the right to do so. Things would seem fine for awhile, but then the pain of frustration would stop by for an extended visit. It became obvious that I had to put things in order in terms of saving, investing, and spending; it was the only way I would ever regain freedom in my financial life.

This post is not a detailed “how to invest” type of article. But, it goes into a general order of when to invest in which types of accounts. I go into a little more detail on the subject of emergency funds and your first retirement account, because I think those accounts are very important to anyone’s financial foundation.

Here is a quick rundown of what I will discuss in more detail below.

  • Spending Accounts/Cash Management Accounts
  • Emergency Fund
  • Retirement Account
  • Extras
    • Discretionary Savings Accounts
    • More Retirement Accounts
    • Taxable Investment Accounts

Section 1: Spending Accounts/Cash Management Accounts

These were commonly called “checking” accounts in my day. But almost no one writes checks anymore, so many financial institutions are transitioning to calling them spending accounts or cash management accounts. Most of the money you earn probably gets deposited into this account. This section is not here because I think you need any guidance on what to do here (put cash in it). No, this section is purely for me to tell you that you need to have your cash flow in order before proceeding to any of the other sections.


Section 2-A: Emergency Fund

  • Type of Accounts: High-yield Savings
  • Type of Investments in Accounts: Cash
  • Recommended Levels:
    • If you are paying of high interest debts like credit cards: $1000-2000
    • If you are debt free aside from a mortgage: At least 3 months of expenses

Section 2-B: Retirement Account(s)

  • Type of Accounts: 401k, 403b, Individual Retirement Accounts (IRAs)
  • Type of Investments in Accounts: Target-Date Funds, Mutual Funds
  • Recommended Levels:
    • If you are paying of high interest debts like credit cards: Contribute, at most, up to the point that your employer matches.*
    • If you are debt free aside from a mortgage: Contribute, at least, up to the point that your employer matches.

Putting it Together

Two types of accounts in this section, because you’re going to want to both of them at the same time to some degree. I’m putting the emergency fund first because the emergency fund will give you the backup you might to keep the retirement account going in tougher times.

Emergency Fund

The difficulty most people have with moving beyond a simple spending/checking account is feeling like there is enough money coming in to actually save or invest. Well, that feeling is fine to have but not OK to act on, in this case. In fact, when it comes to an emergency fund, it’s better to over-save slightly than to cut your savings short.

Your emergency fund is in a savings account. So, if you have trouble paying all of your bills one month, you can withdraw just a little bit to make it. If you’re thinking something along the lines of “3 or 4%”, then it’s best to start off with 4%; you might just be able to make it happen.

Whether you’re paying off credit cards and are aiming for that $1000-2000 range, or you’re debts are paid and you’re shooting for 3 months of expenses, the key is to find a savings rate that gets you to your goal.

My employer allows me to set up multiple direct deposits out of my pay check. If you can, set up a separate direct deposit for each of your accounts. I have all direct deposits set up as percentages, so the amount I deposit into each account goes up automatically as my pay increases. If you can’t use multiple direct deposits through your work, set up transfers from your spending account into your emergency fund.

If all of your debts are paid off, except for the mortgage, and you’ve reached the upper range of your “months of expenses” goal, you can think about backing off the amount you save a little bit. (BUT, ONLY IF A MORTGAGE IS THE ONLY DEBT YOU HAVE LEFT.)

Retirement Account(s)

We continue putting our money in order with our retirement accounts. So, how do we decide how much to contribute here? Some of this depends on whether your employer offers a retirement plan or if you have to go it alone.

Let me give you an example from my employer:

At my day job, my employer matches my contributions up to 5% of my salary, dollar for dollar on the first 3% and $0.50 on the dollar after that.

If I were still paying off a lot of debt, I would contribute 5% into my 401k and stop there. From that point, I would only change my contribution level if I were having trouble paying my monthly expenses or had paid off my debts. In the case of “I am struggling to pay bills”, I might drop to 3% in a desperate situation; any drop below 3%, giving up a 100% return on my money, would have to be a VERY desperate situation. The key is to create a balance where you are consistently building your emergency fund, building your retirement account, and paying off debts in a consistent way.

If you are paying down debts, and you aren’t offered a retirement account through your employer (ie; no matching dollars), then you can hold off until the debt repayment is done if you want. (Pay those debts as soon as possible.)

And, if the only debt I have is a mortgage?

Here’s where it starts to get fun. I’m down to only one debt and it’s time to start ramping up my retirement saving. To top it all off, you have options, of which I am taking the option that I like to call “both.” The second option involves moving into this post’s section 3.

For the first option, I am increasing my contribution percentage to the recommended 15% of salary. Most retirement account administrators will allow you to automatically increase your contribution periodically. As I write this, I am contributing 11% of my pay and that amount will increase by 1% each year until it reaches 15%, plus the additional 4% my employer kicks in.

You could also choose to max out your contributions for the year (or work towards that level).

For 2020, you can contribute up to $19,500 to a 401k/403b. If you are 50 or more years old, that amount goes up to $26,000 thanks to a $6500 catch-up provision. To figure out how to max out your contributions, divide the maximum allowed contribution by your salary.

For example, if you earn $85,000 per year and are under the age of 50:

$19,500 / $85,000 = 22.94% —> 23%

If your answer is closer to the middle, say 21.6%, use your judgment on whether to us 21% or 22%. Don’t forget to factor in other amounts like overtime or bonuses that count toward employer matching. I don’t have that issue; your situation might be different. You just don’t want to max out before your last pay check, or you risk losing some of your employer’s matching dollars.

If you don’t have access to a 401k or 403b, you’ll want to open an IRA through a brokerage or financial advisor and set up regular contributions to those accounts up to their annual limits.

Other than that, it’s on to…

Section 3-A: Discretionary Savings Accounts

  • Type of Accounts: High-yield Savings
  • Type of Investments in Accounts: Cash
  • Recommended Levels: Variable

Section 3-B: Tax-advantaged Investment Accounts

  • Type of Accounts: IRAs, 529, Health Savings Accounts (HSA), etc.
  • Type of Investments in Accounts: Target-Date Funds, Mutual Funds, Individual Stocks*
  • Recommended Levels: Variable, but max them out if you can.

Section 3-C: Taxable Investment Accounts

  • Type of Accounts: Brokerage Account
  • Type of Investments in Accounts: Target-Date Funds, Mutual Funds, Individual Stocks
  • Recommended Levels: Variable

Putting it Together

A lot of things have to go right for you to get here, but it can be very rewarding if you find yourself able to put your money to work in section 3. I would dare say it might be easier to move beyond emergency funds and 401ks if you’ve just finished paying down a big debt than if you had your act together from the get-go. You just have to forego bloating some of your lifestyle with the money your not making payments with anymore. (It’s always a good idea to make sure your family is adequately insured, though. Schedule a check-up for things like that if you haven’t done so.)

With each of these accounts, it’s OK to start funding with 1% of your take-home pay, or even a small dollar amount like $5-10. You’re free to find what works for your financial situation.

Discretionary Savings

In my life, I actually opened this account last, but would probably start this one a lot sooner if I were doing it all over again.

This account is just a savings account that you use to save for fun things like travel, your next vehicle, or a new piece of electronics (TV or cell phone, for instance). I have an account earmarked for travel with Marcus, but Ally also has an account with a “buckets” feature that allows you to split up your money for multiple fun money goals in a single account.

Tax-advantaged Investment Accounts

There are a lot of options here, and where your dollars go depends a lot on your situation. For me, I went with a Roth IRA. There are also traditional IRAs, 529 plans, Health Savings Accounts, and any number of other investment/savings accounts.

I would love to go over, specifically, how to invest in these accounts. But, how you invest depends on your goals for that account. For IRAs, it’s probably OK to invest similarly to your Section 2 Retirement account. If you’re happy with your level of investment in your main retirement account, you can branch out into picking individual stocks on your own; I would only choose individual stocks if you both have the time to research the companies that you are buying and enjoy doing that type of research.

Beyond that, you probably want to sit down with an experienced financial advisor. (Search for CFPs…Certified Financial Advisors…in your area.)

Taxable Investment Accounts

This is where my heart is, folks.

Investing in a taxable account can give you some extra income that you can access today. (Retirement accounts usually make you wait until you’re almost 60 years old to access your money without any penalties.)

You can invest in this account just like you do in your retirement accounts above, target date funds, mutual funds, or individual stocks. I’ll get into specifics in future posts.

The main thing to keep in mind if you invest in a taxable account is that, well, it’s taxable. Any dividends or capital gains you earn in these accounts need to be reported on your tax forms each year (even if you reinvest those dividends and capital gains). Don’t let that discourage you. If you earn enough to have an impact on your taxes (usually takes awhile to get there), you’re probably earning enough to buy stuff, too.

Hopefully, this post has given you an idea of how to set up a general order of attack for investing your money. You don’t have to do all of these, of course. Just try to find the right combination of accounts and the amounts that you can invest on a consistent basis. I’ve taken things out of order, and the repeated starting and stopping can be very frustrating.

It may take you a few tries to get the correct amount of money flowing toward each account, but the effort is well worth it.

Thank you for visiting Finunciate. Come back soon.

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