We’ve covered it before but saving early can yield HUGE results over the long term. You benefit from building good habits, getting compound growth on your side, and from actually saving up money.
However, one of the most common questions I get from clients is about where to save their money. After all, you want to have some in the bank so you can use it for day to day living but having it all there is likely a bad idea.
As always, this is general advice and there are many things that could impact the actual order you use.
Account types
First, check out this article for a rundown on the different types of accounts that are available to you. It’s a pretty long article but it’s super helpful.
In this article we’re going to cover an employer account, a HSA, and IRAs.
Saving order
The basic principle in your account funding order is this: free money is best, then you care about tax efficiency, and then control and cost. Free money is best because it’s hard to find. After that, odds are that tax efficiency gives you the best bang for your buck. Finally, cost and control are really important factors. After all, cost is essentially negative return. Control is important because you can often choose your costs or just flat out have better options.
As always, this is something I use as a starting place for working with clients. You won’t necessarily fit that mold, it’s on you to figure out if it makes sense for you (or hire me to do it!). Finally, this is the order in which you
Given that, my general model for funding accounts is this:
- Take advantage of free money in an employer retirement account if they offer matching. That means putting in exactly as much as gets you the full match.
- Fill up your emergency fund.
- Fund your HSA if you’re eligible since it gets a triple tax benefit. Fill the sucker up. You also have more access to funds in an HSA than in other tax advantaged accounts.
- Fill up a traditional or Roth IRA. That’s $5,500, generally.
- Go back to your employer account and fill it up.
- Finally, if you have money left over still (good on you) then start considering investing in a taxable account.
Conclusion
When you’re starting out investing it’s pretty important to make sure that you’re putting your money in the right place. After all, you can get the same investments in most types of accounts. It’s the account itself that confers a lot of the tax benefit. Use this outline when you’re putting together your plan!
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here.
