Managing your money can seem stressful, especially when you have competing goals like saving for retirement, funding your children’s education, paying off debt, and preparing for unexpected expenses. If you are having difficulty knowing how and where to save,… Savings book Provides a logical prioritization to ensure you’re using your money in the most impactful way.
Let’s break down why this step-by-step saving guide makes sense.
1. The first step of the saving rules: create an appropriate emergency fund
Building an emergency fund is the foundation of financial security. Why is it the first step in the rules of saving? Because life is unpredictable, unexpected expenses like medical bills, car repairs, or a temporary job loss can derail your finances and plunge you into debt — making generating wealth more difficult — if you’re not prepared.
Rationale:
- Saving three to six months of living expenses provides a safety net that prevents you from relying on credit cards or high-interest loans.
- In retirement and living on savings, you may want to maintain one to three years of income in cash or low-risk investments to ensure you do not need to sell investments at a loss to generate the necessary income.
- It gives you peace of mind, allowing you to focus on other financial priorities without constantly worrying about unexpected costs.
2. Record employer compliance in your retirement plan
Contributing enough to an employer-sponsored retirement plan to secure a company match is 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 to your advantage, growing your retirement savings over time.
3. Pay off high-interest debt
Debts with high interest rates, such as credit cards or personal loans, can quickly drain your money. Prioritizing your repayments is a crucial step in achieving financial freedom.
Rationale:
- High-interest debt grows faster than most investments, so paying it off is a surefire way to improve your financial health.
- Reducing debt improves your cash flow, allowing 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 on current and future health care costs while enjoying significant tax benefits.
Are you surprised that this comes before maxing out IRAs and 401ks? Here’s why:
Rationale:
- Health savings accounts have a triple tax advantage: contributions are tax-deductible, growth is tax-deductible, and withdrawals for qualified expenses are tax-deductible.
- The funds can roll over from year to year, making HSAs a long-term investment vehicle for health care expenses in retirement.
5. Max out of the IRA
Individual Retirement Accounts (IRAs) provide additional tax-advantaged savings options to supplement your employer’s plan.
Rationale:
- IRA accounts offer flexibility, allowing you to choose between traditional (tax-deferred) or Roth (tax-free withdrawal) accounts based on your financial situation.
- Diversifying your retirement accounts can improve your tax strategy during retirement.
6. Make the most of your employer plan
Once you’ve covered your bases with emergency savings, debt reduction, and initial retirement contributions, it’s time to maximize your employer-sponsored plan.
Rationale:
- Employer plans, such as 401(k), often have higher contribution limits than IRAs, allowing you to accelerate your retirement savings.
- Contributions lower your taxable income, providing immediate tax benefits.
Note: Use Boldin’s chart to see how much you’re eligible to contribute and how much you’re on track to save in tax-advantaged retirement savings (401k and IRAs). Evaluate your retirement savings opportunity.
7. Contribute to after-tax accounts such as a 529 plan
If you still have money available, you can save for future goals such as education or other long-term expenses through after-tax accounts.
Rationale:
- 529 plans provide tax-free growth for education expenses, making them ideal for college saving.
- After-tax accounts also provide flexibility for goals that don’t fit neatly into the retirement or health care categories.
8. Pay off low-interest debt, such as your mortgage
Finally, consider paying off low-interest debt. Although it’s not as pressing as high-interest debt, canceling this debt can provide psychological and financial freedom.
Learn more about the differences between good (good enough) debt and bad debt and evaluate the trade-offs between paying off your mortgage versus saving and investing.
Rationale:
- Paying off your mortgage early reduces long-term interest payments, freeing up more cash flow for other goals.
- Once your other financial priorities are met, being debt-free enhances your sense of financial security.
conclusion
the Savings book Prioritizes your financial goals in a logical sequence, ensuring immediate needs are met, guaranteed benefits are met, and long-term wealth is built. 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 moving toward your broader goals with confidence.
Use tools like Bouldin Retirement Plan To customize this playbook to fit your unique situation, ensuring your financial journey is as effective and impactful as possible.
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