![\"Where](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2021\/08\/Where-to-Put-Your-Money-Now.png\")
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Today I\u2019m sharing where to put your money now (and in what order!).<\/p>\n
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Following this step-by-step guide can lead to massive tax savings over your lifetime<\/strong>.<\/p>\n
It can also help protect you when the markets take a turn for the worst.<\/p>\n
The problem is there are so many ways to invest and save. It\u2019s overwhelming.<\/p>\n
<\/p>\n So if you want answers to questions like\u2026<\/p>\n
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\u2026today\u2019s comprehensive guide is for you!<\/p>\n
<\/p>\n To help you figure out the best place to put your money now, we\u2019ve created the following step-by-step guide.<\/p>\n
<\/p>\n Please recognize that not every savings or investment option discussed may be right for you.<\/p>\n
<\/p>\n You may already have a rainy-day fund (Step #1).<\/p>\n
<\/p>\n Or, you may not be able to make after-tax contributions to your workplace retirement plan (Step #8).<\/p>\n
<\/p>\n If an option doesn\u2019t pertain to you, just move onto the next step!<\/p>\n
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<\/p>\n Already have a rainy-day fund? Then skip to the next step: paying off debt<\/a>.<\/em><\/p>\n
<\/p>\n Creating a rainy-day fund, before<\/em> funding any investment accounts, is step number one for every retirement saver. You never know when you might need easily accessible money.<\/p>\n
<\/p>\n Consider a worst-case scenario: Your car or your home need an expensive repair.<\/a><\/p>\n
<\/p>\n Or, on the upside: You want to invest in a new opportunity, and you need seed money!<\/p>\n
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<\/p>\n \u201cWhere are you going to pull the money from?\u201d<\/p>\n
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<\/p>\n What if all your money is locked up in a retirement account \u2013 like your 401(k)? There are tax penalties for removing money early<\/a>.<\/p>\n
<\/p>\n If you choose to borrow on credit, like using a credit card or a home equity line of credit, you\u2019ll have to pay interest.<\/p>\n
<\/p>\n There\u2019s a benefit to having cash that\u2019s accessible without penalties or fees.<\/p>\n
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<\/p>\n How much cash should you stash? The CERTIFIED FINANCIAL PLANNER Board of Standards suggests you save up to six months of mandatory <\/strong>living expenses. This means you should save enough cash to pay six months of rent (or mortgage payments), car insurance, groceries, and more.<\/strong><\/p>\n
<\/p>\n Hint: You\u2019ll want to save for 6 months worth of bare necessities. You don\u2019t have to save cash for dining out, gifts for family and friends, or any other luxuries. Only save for the necessities. If you want to keep more<\/em> than six months of living expenses in cash, that\u2019s fine too.<\/p>\n
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<\/p>\n Don\u2019t settle for stashing your cash just anywhere. Make your money work for you!<\/p>\n
<\/p>\n Your local bank or credit union usually won\u2019t give you much of a return for storing your money. Instead, consider an online, high-yield savings account. NerdWallet has a list of online savings accounts offering the highest interest rates.\u00a0<\/a><\/p>\n
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<\/p>\n No debt? That\u2019s great! Skip to the next step!<\/a><\/em><\/p>\n
<\/p>\n Your second priority is to pay off debt. Why pay off debt as your next priority? Paying off debt is a guaranteed investment return<\/em>.<\/p>\n
<\/p>\n When you pay off debt, you get a guaranteed investment return equal to the interest rate of your debt!<\/p>\n<\/div>\n
<\/p>\n A guaranteed investment return<\/em> means that when you put cash towards debt, your return is equal to the interest rate on that debt.<\/p>\n
<\/p>\n Let\u2019s use an example:<\/p>\n
<\/p>\n You\u2019re carrying a credit card balance with an interest rate of 15%.<\/p>\n
<\/p>\n When you use cash to pay down that debt, you\u2019re instantly earning a 15% investment return.<\/strong>\u00a0<\/p>\n
<\/p>\n And let me assure you, earning a 15% investment return is a very big deal. In fact, you probably won\u2019t be able to earn a 15% investment return anywhere else. (And if someone does approach you with a guarantee to earn 15% investment returns, please run screaming from them.<\/a>)<\/p>\n
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<\/p>\n You don\u2019t have to fully understand the concept of paying off debt to take advantage of its benefits. Just know that any money put toward decreasing or eliminating debt is a smart plan. The higher the interest rate on the debt, the more you save when you decrease your debt.<\/p>\n
<\/p>\n You get a big investment return when you pay down debt with a high interest rate.<\/p>\n<\/div>\n
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<\/p>\n If you have more than one source of debt, how do you decide which loan to pay off first<\/em>? Should you pay down your physician mortgage loan<\/a>, auto loan, or credit cards?<\/p>\n
<\/p>\n Mathematically, it makes the most sense to pay off debt with the highest interest rate first. If you have a balance on your credit card and home equity line, throw cash at the credit card first. That\u2019s because your credit card likely charges a higher interest rate than the home equity line of credit.<\/p>\n
<\/p>\n Extinguish debt quickly by paying off debt with the highest interest rate first.<\/p>\n<\/div>\n
<\/p>\n Another strategy for paying off debt is to focus on the smallest balance first. This strategy, popularized by Dave Ramsey,<\/a> is based on human emotion \u2013 and not math.<\/p>\n
<\/p>\n The theory is that we score an emotional high when we close out a loan, regardless of the size or interest rate.<\/p>\n
<\/p>\n Starting small allows you to get a quick win, It\u2019s that \u2018check the box\u2019 satisfaction. Getting this psychological reward encourages us to keep paying off debts until they all disappear.<\/p>\n
<\/p>\n Paying off low-balance loan account balances first can score you an emotional high that will encourage you to keep paying off your debts.<\/p>\n<\/div>\n
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<\/p>\n If you don\u2019t get an employer match for contributions to your workplace retirement account, skip to the next step, funding a Health Savings Account (HSA)<\/a>.<\/em><\/p>\n
<\/p>\n May I interest you in some free money? If so, listen up! Many employers offer employees a \u201cmatch\u201d on money put into their workplace retirement account. Your workplace retirement account may be a 401(k), 403(b), 457(b) or SIMPLE IRA.<\/p>\n
<\/p>\n Employers may offer a dollar-for-dollar match, although sometimes less. Consider an example:<\/p>\n
<\/p>\n Your employer offers a dollar-for-dollar (100%) match. This match is good for up to 5% of your salary. If you\u2019re earning $100,000, and you put $5,000 into the company 401(k), your employer will put in an extra $5,000 on your behalf. That\u2019s real money!<\/p>\n
<\/p>\n Don\u2019t leave free money on the table. Take advantage of the employer match!<\/p>\n<\/div>\n
<\/p>\n Not all employers are this generous; matches vary by employer.<\/p>\n
<\/p>\n Whatever the match, make sure to put enough money into your workplace retirement plan to earn the full employer match.<\/strong> Whether it\u2019s free money in your 401(k), 403(b), 457(b), or SIMPLE IRA, jump on it<\/em>! Anyone who knows anything about money agrees: do not pass up free money!<\/p>\n
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<\/p>\n If you are able to contribute to a Roth 401(k), Roth 403(b), or Roth 457(b), strongly consider it over a traditional option.<\/a><\/p>\n
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<\/p>\n I love the Health Savings Account<\/a>. I like to call it the \u201cmagical unicorn of tax-advantaged investment accounts.\u201d (Only a real money nerd would describe it as such.)<\/p>\n
<\/p>\n Why so much love for the HSA? HSA\u2019s have not one<\/em>, not two<\/em>, but three<\/em> tax advantages. Yes, Health Savings Accounts are triple<\/em> tax-advantaged<\/a>. No other account offers a benefit this amazing<\/a>.<\/p>\n
<\/p>\n Don\u2019t miss out on these wonderful tax advantages:<\/p>\n
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<\/p>\n To qualify for an HSA, you must be enrolled in a High Deductible Health Plan (HDHP).<\/a>\u00a0If you\u2019re already enrolled in a HDHP, we recommend maxing out your contributions to an HSA.<\/strong><\/p>\n
<\/p>\n If you\u2019re not enrolled in a HDHP, consider switching over so you can max out your HSA and save on taxes.<\/p>\n
<\/p>\n Keep in mind HDHPs are a very particular type of health coverage and are not right for everyone.<\/p>\n
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<\/p>\n No access to an Employee Stock Purchase Plan (ESPP)? Skip to the next step of maxing out your workplace retirement plan<\/a>.<\/em><\/p>\n
<\/p>\n Why pay retail when you can get a discount? It\u2019s the same for employer stock! With an Employee Stock Purchase Plan (ESPP), you can purchase shares of your employer\u2019s stock at a discount.<\/p>\n
<\/p>\n An ESPP allows you to buy your employer\u2019s stock at a discount. Don\u2019t pass up the discount!<\/p>\n<\/div>\n
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<\/p>\n Once you purchase company stock at a discount, what do you do with it? Hold it forever? No! Sell it!<\/em><\/p>\n
<\/p>\n Financial planning 101 says:<\/p>\n
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<\/p>\n Don\u2019t put all your eggs in one basket.<\/p>\n
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<\/p>\n All your eggs are in the same basket when you buy (and keep) your employer\u2019s stock. Owning some of your employer\u2019s stock means that both your paycheck and your wealth (investments) are dependent on the same company.<\/p>\n
<\/p>\n Reduce your risk by selling all of your employer\u2019s stock.<\/p>\n<\/div>\n
<\/p>\n So what do you do? We love reducing risk and we don\u2019t want all our eggs in one basket, but this doesn\u2019t mean we should pass up a good deal. You reduce the risk by buying and then selling the stock.<\/p>\n
<\/p>\n Our recommendation: Take advantage of your employer\u2019s ESPP and buy company stock at a discount \u2013 and then immediately sell it for a profit!<\/strong><\/p>\n
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<\/p>\n No workplace retirement plan? Skip to the next step of funding a Roth IRA<\/a>.<\/em><\/p>\n
<\/p>\n If you\u2019ve already managed to accomplish all of the above, great job!\u00a0 Now, we\u2019re onto the next step: maxing out your workplace retirement plan!<\/p>\n
<\/p>\n If you\u2019re following the steps, you are already contributing the minimum to get your employer match. Your next step is to work towards increasing your contribution to the maximum. Your maximum contribution limit varies by age and plan type. Those under 50 can contribute $22,500 to either their 401(k), 403(b), or 457(b) in 2023. Those age 50+ can contribute an additional $7,500. Some government employees with access to both a 403(b) and<\/em> 457(b) are eligible to contribute $22,500 to each <\/em>plan<\/a>. That means you can put away $45,000 in tax-advantaged money! The maximum contribution to a SIMPLE IRA plan is $15,500 for 2023. Those age 50+ can contribute an additional $3,500<\/a>.<\/p>\n
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<\/p>\n There is one exception to contributing the maximum dollar amount to your workplace retirement plan: do so only if you\u2019re sure the expenses on your workplace retirement plan are reasonable. Usually, this means having underlying fees (called expense ratios) of less than half a percent (0.5%)<\/a>. The lower the expenses, the better.<\/p>\n
<\/p>\n Keeping your investment expenses low is critical to investment success.<\/p>\n<\/div>\n
<\/p>\n Most commonly, 403(b)s have high fees<\/a>. If you\u2019re using a 403(b), get extra familiar with the plan\u2019s expenses.<\/p>\n
<\/p>\n Regardless of the type of plan, if the expense ratios are higher than 0.5%, you may want to skip to the next step: maxing out an Individual Retirement Arrangement (IRA) account.<\/a><\/p>\n
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<\/p>\n Why not skip straight to funding the Roth IRA instead of using your workplace retirement plan? Firstly, you can put a lot more money into a 401(k), 403(b), 457(b), or SIMPLE IRA than you can a traditional or Roth IRA.<\/p>\n
<\/p>\n Secondly, when you use your workplace retirement plan to save money, you\u2019re taking advantage of automation: money goes into savings directly from your paycheck \u2013 before <\/em>you ever have a chance to spend it. Bonus: Studies have shown automation helps people to save more<\/a> (another human psychology thing). We\u2019re big fans of automating your savings because it makes saving money easy!<\/a><\/p>\n
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<\/p>\n Once you\u2019ve completed the above, contribute the maximum a Roth IRA. (We\u2019re also big fans of Roth IRAs<\/a>.)<\/p>\n
<\/p>\n If you earn too much to contribute to a Roth IRA<\/a>, consider the back-door Roth technique: contribute to a non-deductible IRA and then<\/em> make a conversion to a Roth IRA. This usually works best when you don\u2019t have any money in traditional, SEP or SIMPLE IRA accounts<\/a>. Contributing to a traditional IRA or a nondeductible IRA are also good options. However, there are income-based limits on the deductibility of IRA contributions.<\/p>\n
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<\/p>\n One option for making a successful back-door Roth contribution is rolling existing traditional IRA (and similar) accounts into an employer\u2019s retirement plan, such as a 401(k), 403(b), and 457(b). This move avoids creating tax consequences during the Roth conversion process.<\/p>\n
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<\/p>\n Only employees may contribute to a workplace retirement plan, employee\u2019s spouses cannot.<\/p>\n
<\/p>\n That\u2019s not the case for IRA accounts. A non-working spouse can contribute to an IRA (so long as the total household contributions to both IRAs do not exceed the household\u2019s taxable income)<\/a>. Contributing to a spousal IRA allows your household to save twice as much money in a tax-advantaged account. Don\u2019t miss this opportunity to save more money!<\/p>\n
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<\/p>\n As with putting money in your workplace retirement plan, remember to keep your investment expenses (expense ratios) low. A great way to do this is to invest in a low-cost and broadly-diversified index fund.<\/a><\/p>\n
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<\/p>\n If you don\u2019t have a workplace retirement account, or if your workplace retirement account doesn\u2019t allow after-tax contributions, skip to the next step of funding a 457(f) plan<\/a>.<\/em><\/p>\n
<\/p>\n Not all workplace retirement plans allow \u201cafter-tax contributions.\u201d<\/p>\n
<\/p>\n If your employer does offer \u201cafter-tax\u201d contributions, and you\u2019ve already checked the box for steps 1-7, then keep shoveling cash into your workplace retirement plan \u2013 on an after-tax basis. While you won\u2019t get a tax deduction for your contribution, the contributions will still grow tax-deferred.<\/p>\n
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<\/p>\n The deferred compensation contribution limit is $66,000 in 2023 for those age 50 and under<\/a>. Those age 50+ can contribute an additional $7,500. If you\u2019ve already put in the maximum pre-tax contribution of $22,500 into your traditional 401(k) or the maximum post-tax contribution into your Roth 401(k) in step #6<\/a>, you can still put an additional $43,500 in after-tax dollars into some workplace retirement plans.<\/p>\n
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<\/p>\n Know that after-tax contribution limits are reduced by any employer contributions. If you put $22,500 in your 401(k), and your employer match is $5,000, you can only contribute $38,500 in after-tax dollars to your 401(k).<\/p>\n
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<\/p>\n With money in an after-tax account, you may also have the option to perform a \u201cMega-Back Door Roth.\u201d<\/a> With basis in your contributions (since you didn\u2019t take a deduction for your contribution), this \u201cafter-tax\u201d money can be converted to \u201cpost-tax\u201d money tax-free. This move will allow you to distribute this money \u2013 and it\u2019s growth \u2013 tax-free in retirement.<\/p>\n
<\/p>\n Again, the great thing about putting money into your workplace retirement plan is that it takes advantage of the wonderful tool of automation<\/a>.<\/p>\n
<\/p>\n Keep your investment expenses low.<\/p>\n<\/div>\n
<\/p>\n Don\u2019t forget, only go with this step once you\u2019ve confirmed that the expenses (expense ratios) in your workplace retirement plan are 0.5% or less. If not, you can skip to the next step.<\/p>\n
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<\/p>\n If you don\u2019t have access to a 457(f) plan, skip to the next step of investing with a taxable account<\/a>.<\/em><\/p>\n
<\/p>\n One of our last recommendations is to put money into a 457(f) deferred compensation plan. Why did we put this option so low on the list? These plans are riskier because they don\u2019t offer creditor protection. A 401(k), for example, offers creditor protection for money inside the 401(k).\u00a0Without creditor protection, if the company you\u2019re working for goes bankrupt, any money in a deferred compensation 457(f) plan may be lost<\/a>.<\/p>\n
<\/p>\n For this reason, some folks are turned off by executive savings 457(f) plans. After all, who wants to lose their retirement savings because of someone else\u2019s error? That\u2019s why contributing to an executive savings 457(f) plan usually only makes sense when an investor already has enough retirement savings. In this instance, a highly-paid executive may simply be looking to lower their tax bill.<\/p>\n
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<\/p>\n As with all workplace retirement plans, remember to consider expenses (expense ratios) before contributing your hard-earned money to an executive savings plan.<\/p>\n
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<\/p>\n If you\u2019ve run out of tax-advantaged places to put your money, you can always put money into a taxable investment account. Even though you will pay taxes for dividends and capital gains every year, a low-cost, set-it-and-forget-it investment approach can still mean relatively minimal taxes and long-term investment growth.<\/p>\n
<\/p>\n Make sure to use low-cost index funds<\/a> \u2013 and then leave them alone. Don\u2019t be tempted to tinkle or trade. Just forget about it!<\/a><\/p>\n
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<\/p>\n I could list dozens of things not<\/span> to do with your extra cash, but I\u2019ll leave you with one for today:<\/p>\n
<\/p>\n Do not buy expensive-but-tax-advantaged investment products.<\/p>\n
<\/p>\n Permanent life insurance (e.,g, whole life insurance and universal life insurance)<\/a> and annuities are an example. While the salesperson disguised as a financial advisor<\/a> may insist otherwise, these products are not a great place for your money.<\/p>\n
<\/p>\n Of course, there are always exceptions to the above. These types of investments can make sense for a small percentage of savers who have very unique situations.\u00a0<\/p>\n
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<\/p>\n Congrats! Saving money is a big accomplishment. Now you know how<\/em>, when,<\/em> and where<\/em> to put your extra cash.<\/p>\n
<\/p>\n No extra cash? No problem.<\/p>\n
<\/p>\n Learn how to track your spending to start saving more money<\/a>.<\/p>\n
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<\/p>\nWhere Should I Put My Money? A Simple Framework<\/h2>\n
#1: Prioritize a Rainy-Day Fund: The First Place to Put Spare Cash<\/h2>\n
How Much Cash to Stash<\/h3>\n
Where Should You Keep Your Rainy-Day Fund?<\/h3>\n
#2: Pay Off Debt with Extra Cash<\/h2>\n
![\"When](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/debt-prepayment-v2-1024x576.jpg\"\/ "\\"Where")
![\"When](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/debt-prepayment-v2-1024x576.jpg\" "\\"Where")
<\/p>\nPaying Off Debt is a Really Good Deal<\/h3>\n
![\"Pay](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/11\/big-return-when-you-pay-down-debt-1024x576.jpg\"\/)
![\"Pay](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/11\/big-return-when-you-pay-down-debt-1024x576.jpg\")
<\/p>\nStrategies to Pay Down Debt<\/h3>\n
![\"Extinguish](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/pay-high-interest-debt-first-v2-1024x576.jpg\"\/)
![\"Extinguish](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/pay-high-interest-debt-first-v2-1024x576.jpg\")
<\/p>\n![\"\"](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/10\/pay-low-balance-debt-first-v2-1024x576.jpg\"\/)
![\"\"](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/10\/pay-low-balance-debt-first-v2-1024x576.jpg\")
<\/p>\n#3: Employer Match on Workplace Retirement Accounts<\/h2>\n
![\"Take](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/employer-match-v2-1024x576.jpg\"\/)
![\"Take](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/employer-match-v2-1024x576.jpg\")
<\/p>\nUse the Roth Option<\/h3>\n
#4: Should I Max Out My HSA? (Hint: Yes!)<\/h2>\n
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#5: Employee Stock Purchase Plan (ESPP)<\/h2>\n
![\"An](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/ESPP-where-to-save-money-first-1024x576.jpg\"\/)
![\"An](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/ESPP-where-to-save-money-first-1024x576.jpg\")
<\/p>\nWhat To Do With Stock from an ESPP<\/h3>\n
![\"Diversify](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/10\/dont-own-company-stock-1024x576.jpg\"\/)
![\"Diversify](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/10\/dont-own-company-stock-1024x576.jpg\")
<\/p>\n#6: Contribute the Maximum to Your Workplace Retirement Plan<\/h2>\n
Review the (Sometimes Hidden) Expenses on Your Workplace Retirement Plan<\/h3>\n
![\"Keeping](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/Expense-Ratio-1024x576.jpg\"\/)
![\"Keeping](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/Expense-Ratio-1024x576.jpg\")
<\/p>\nYour Workplace Retirement Plan vs. the Roth IRA<\/h3>\n
#7: Max Out a Roth IRA<\/h2>\n
Employer Retirement Plan Rollover for a Back-Door Roth Contribution<\/h3>\n
Spousal IRA<\/h3>\n
Mind Your Expenses<\/h3>\n
#8: After-Tax Contributions to Your Workplace Retirement Plan<\/h2>\n
After-Tax Contribution Limits to Your 401(k) Plan<\/h3>\n
![\"Defined](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2023\/07\/Defined-Contribution-Funding-1024x564.png\"\/)
![\"Defined](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2023\/07\/Defined-Contribution-Funding-1024x564.png\")
<\/p>\nMega-Back Door Roth<\/h3>\n
![\"Save](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/Expense-Ratio-1-1024x576.jpg\"\/)
![\"Save](\"https:\/\/www.definefinancial.com\/wp-content\/uploads\/2019\/08\/Expense-Ratio-1-1024x576.jpg\")
<\/p>\n#9: Deferred Compensation and Executive Savings 457(f) Plans<\/h2>\n
Again with Investment Expenses<\/h3>\n
#10: Taxable Investment Account with Low-Cost Index Funds<\/h2>\n
Bonus: Please Don\u2019t Do This with Your Cash<\/h2>\n
In Summary: The Best Places to Put Your Money<\/h2>\n