Managing your finances can feel overwhelming, especially when you have competing goals like saving for retirement, funding children’s education, paying off debt, and preparing for unexpected expenses. If you are struggling with how and where to save, the Savings Playbook provides a rational order of priorities to ensure that you’re using your money in the most impactful way.
Let’s break down why this step-by-step savings playbook makes sense.
1. Step 1 of the Savings Playbook: an Adequate Emergency Fund
Building an emergency fund is the foundation of financial security. Why is it the first step in the savings playbook? Because life is unpredictable, and unexpected expenses like medical bills, car repairs, or temporary job loss can derail your finances and plunge you into debt – making wealth generation even more difficult – if you’re unprepared.
Rationale:
- Having three to six months’ worth of living expenses saved provides a safety net that prevents you from relying on high-interest credit cards or loans.
- In retirement and living off of savings, you may wish to maintain one to three years of income in cash or low risk investments in order to ensure you don’t need to sell off investments at a loss for necessary income.
- It gives you peace of mind, allowing you to focus on other financial priorities without the constant worry of unforeseen costs.
2. Capture the Employer Match in Your Retirement Plan
Contributing enough to your employer-sponsored retirement plan to secure the company match is like unlocking free money for your future.
Rationale:
- Employer matches are essentially a guaranteed return on your contributions. Not taking advantage is like leaving money on the table.
- Starting early allows compound interest to work in your favor, growing your retirement savings over time.
3. Pay Down High-Interest Debt
Debt with high interest rates, such as credit cards or personal loans, can drain your finances quickly. Prioritizing its repayment is a critical step in achieving financial freedom.
Rationale:
- High-interest debt grows faster than most investments, so paying it off is a guaranteed way to improve your financial health.
- Reducing debt improves your cash flow, enabling you to allocate more money to savings and other goals.
4. Contribute to a Health Savings Account (HSA)
If you have access to a Health Savings Account (HSA), this is an excellent way to save for current and future healthcare costs while enjoying significant tax advantages.
Surprised that this comes in before maxing out IRAs and 401ks? Here’s why:
Rationale:
- HSAs are triple-tax advantaged: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are tax-free.
- Funds can roll over year to year, making HSAs a long-term investment vehicle for healthcare expenses in retirement.
5. Max Out an IRA
Individual Retirement Accounts (IRAs) offer additional tax-advantaged savings options to supplement your employer plan.
Rationale:
- IRAs provide flexibility, allowing you to choose between traditional (tax-deferred) or Roth (tax-free withdrawals) accounts based on your financial situation.
- Diversifying retirement accounts can optimize your tax strategy during retirement.
6. Max Out Your Employer Plan
Once you’ve covered your bases with emergency savings, debt reduction, and initial retirement contributions, it’s time to fully maximize your employer-sponsored plan.
Rationale:
- Employer plans, like 401(k)s, often have higher contribution limits than IRAs, enabling you to accelerate your retirement savings.
- Contributions lower your taxable income, offering immediate tax benefits.
NOTE: Use the Boldin Planner to see how much you are eligible to contribute and how much you are on track to saving into tax advantaged retirement savings (401ks and IRAs). Assess your retirement savings opportunity.
7. Contribute to After-Tax Accounts Like a 529 Plan
If you still have funds available, you can save for future goals like education or other long-term expenses through after-tax accounts.
Rationale:
- 529 plans offer tax-free growth for education expenses, making them ideal for college savings.
- After-tax accounts also provide flexibility for goals that don’t fit neatly into retirement or healthcare categories.
8. Pay Off Low-Interest Debt, Like Your Mortgage
Finally, consider paying off low-interest debt. While it’s not as urgent as high-interest debt, eliminating this debt can provide psychological and financial freedom.
Learn more about the differences between good (okay-enough) and bad debt and assess the trade offs of paying off your mortgage vs. saving and investing.
Rationale:
- Paying off your mortgage early reduces your long-term interest payments, freeing up more cash flow for other goals.
- Once you’ve met your other financial priorities, being debt-free enhances your sense of financial security.
Conclusion
The Savings Playbook prioritizes your financial goals in a logical sequence, ensuring that you address immediate needs, take advantage of guaranteed benefits, and build long-term wealth. This step-by-step framework helps you make the most of your money by balancing risk, growth, and stability. By following this plan, you can build a solid financial foundation while progressing toward your broader goals with confidence.
Use tools like the Boldin Retirement Planner to customize this playbook for your unique situation, ensuring your financial journey is as efficient and impactful as possible.