There’s three stages to your money. Making it, Saving it, and then Investing it. We’re going to focus on where your money should be invested in the most optimal way.
It’s a looong list, so if you don’t have enough time to go through it step-by-step, bookmark this page so you can come back to it.
1. Emergency Fund
First, figure out your average monthly expenses by looking at the last 12 months of your spending. If you don’t have Personal Capital already, it’s FREE and makes it super simple by telling you your monthly expenses broken down by category.
Once you figure out your monthly expenses, make sure you have 3-6 months of average monthly expenses for your emergency fund. You should store your emergency fund in a high-yield savings account to get the most amount of money for passive income. The big banks barely give you 0.1% interest because they have physical branches and that requires a ton more expenses and they’re big, so they rely on word of mouth instead of great interest rates.
The banks that offer high-yield accounts are ones that are digital banks — don’t worry, they’re FDIC insured, which means the government will guarantee $250,000 per person per account if the bank fails.
I use CIT Bank because they offer the highest yields out there and bump up their yield every time the Fed raises rates. They’re currently at 1.85%. They also only need a minimum of $100 and don’t have any extra fees. Check your current savings account for what your current yield is. Switching to a high-yield savings account could add hundreds of dollars a year to your passive income.
Check out CIT Bank to get 1.85% in interest and start earning hundreds more a year.
2. 401k Match (also 403b, 457, TSP, etc)
After you get your emergency fund situated, make sure you’re putting money in your 401k. Ask your HR department if there is a 401k “Match”, which means the company matches the amount you put in your 401k. Contribute that amount to your 401k up to that match amount per pay period. If you’re not sure if your 401k is invested properly (ie, your account should get the lowest expense ratios, not be too conservative/risky, and diversify your holdings of stock/bond indices).
Below I wrote a blog post about the most common 401k mistakes people make, but if you’d rather a program tell you exactly what you’re doing wrong for free, check out Blooom’s free tool that analyzes your 401k in less than 15 minutes.
*If you’re in the government or at a non-profit your version of the 401k might be called the 403b, 457, TSP, etc.
3. Pay off High-Interest Debt (Credit Cards)
Pay off your high-interest debt, which we’re defining here as 5 percent and up. The average credit card interest rate is above 16 percent, which will kill you. For reference, your target date retirement fund might only return 8 percent. If you have high interest credit card debt, you need to pay that off ASAP.
You can get 0 percent interest for 15-21 months via credit cards that offer a 0% promo APR for that period of time. If you can’t pay it off in that amount of time, you can try rolling those balances over to another card once that period is up. The best ones have a balance transfer fee of 3%. That’s roughly a 2% interest rate a month while you pay off those large balances.
Check out some credit cards that give you a 0 percent interest rate for 15-21 months to pay off that debt early and reduce your interest rate to save a ton of money.
4. Refinance High-Interest Student Loans
Most people don’t realize this, but you can get a lower interest rate on your student loans after you graduate. Why? The companies who will loan you money consider you less of a risk now that you’ve graduated. Your new lender will pay off your old loan and you’ll get a lower interest rate on that loan, which will end up saving you thousands in interest. I explain refinancing in depth on this previous article.
You can see what rates you’d get currently through Lendkey, which aggregates credit unions together to find you the lowest rate. Think of LendKey like Kayak for student loan rates. It isn’t a hard credit pull, so it doesn’t affect your credit score to see what new rate you can get.
5. Short-Term Savings
If you are saving for something within the next few years, you shouldn’t be putting those dollars in an retirement account. There are 2 ways to get money early from retirement funds tax-free, but one requires you to take out distributions of money each month (72t) and the other requires a 5-year ladder (Roth ladder). Neither of these options are something you’d want for a short-term purchase.
If you’re saving for something in the short-time, it might be a better idea to just put it in a high-yield savings account.
6. Health Savings Account (HSA)
HSA’s are only available for High-Deductible Health-Plan’s (HDHP), so not everyone will have access to the HSA. Ask your HR if you have access to an HSA. If you don’t have access to a HSA, ask if you can put money in a FSA. Even though a FSA is more use-it-or-lose-it, with only a small amount that can be rolled over each year, it’s better than nothing if you have medical bills each year.
Max out your HSA, which is triple tax-free if used to medical expenses, which you can use at any time. That means you can contribute to the account pre-tax, it’ll grow tax free, and you can take it out tax free as well for medical expenses. However, if you are super healthy and have a ton in that account at 65 (even though when you are past 30 it seems monthly insurance premiums are $500+ for health insurance), you can withdraw it just like a Traditional IRA. You’ll need to pay ordinary income tax on it, but that’s the same as a Traditional IRA.
For a single person the 2018 contribution limit is $3,450 and for those with families it’s $6,900.
7. IRA (Traditional vs. Roth)
The traditional IRA is similar to the 401k, in that you can put in pre-tax amounts into your account. The Roth IRA requires you to to put in post-tax dollars. In short, if you think your tax rate will be higher in retirement, a Roth might be better. If you expect lower taxes, a Traditional Roth might be better.
If you are a high-income household, then you’ll need to do a backdoor Roth.
The 2018 contribution limit for the IRA is $5,500.
8. Max out 401k
After maxing out your Roth and contributing up to the match, you can continue to max out your 401k, which has a contribution limit of $18,500 for 2018. Remember, you can contribute pre-tax dollars to your 401k, but will need to pay ordinary income taxes when you take out that money.
9. Side-Hustle/Self-Employment Income – i401k or SEP IRA
If you have a side hustle, you can sock away tax-advantaged dollars into either a i401k or SEP IRA. Don’t have a side hustle? Check out a list of 150+ side hustles and ways to make money.
If you have both a 401k and an i401k, you can sock up to $54.5k for 2018. If you have really incredibly lucrative ventures, you can sock away up to $108k per year if you have a 401k and a SEP IRA, but you need to be aware that you must contribute the same percentage of everyone’s salaries to their SEP IRAs.
If you plan on having kids want to contribute to their college fund, consider a 529 account.
You can also open a 529 account for your/spouse’s college education. So if you’ve already gone to college, you can open a 529 account to contribute to your future graduate school.
If you’re opening a 529 account, check out CollegeBacker (FREE) to find a low-expense + tax-deductible 529 account. There are different rules for every state (some are not tax-deductible and some are, some have higher expenses fees), so it’s great there’s a free program that helps you with this.
11. Non-Tax Advantaged Accounts
After maxing out al your tax-advantaged accounts and accounting for your short-term savings, you can invest in the below.
11.a Robo-Advisor or Brokerage
If you want to DIY your portfolio or invest in a target date fund, check out this post I wrote about Vanguard.
If you want a robo-advisor, which just means an algorithm invests and rebalances your portfolio in a manner with normal portfolio theory, check out Ellevest. They offer a free investment plan and free access to financial professionals if you invest with them. They charge .25% of assets under management (AUM), which comes out to $25 per $10,000.
11.b Diversify With Real Estate Crowd-Funding
Since most of your accounts above are stocks or bonds, you might want to consider real estate for the rest of your portfolio. If you can’t afford an entire property or are not ready to deal with the potential headaches of real estate ownership, you can invest in parts of real estate for as little as $500. Check out FundRise.