By the time people get into their 20s and 30s and have figured out how to live within their means, they usually arrive at a daunting question: Where should I save my money?
In general, there is a hierarchy of where you should save.
#1 is to get your 401(k) (or 403(b)) match if your employer offers one. It’s very unlikely that this isn’t the best use for your savings because you’re getting an immediate return from your employer.
#2 is where it starts to get tricky, but for me, the next priority is an emergency fund. Everyone’s emergency fund needs are different, but 3 months of expenses is a good place to start.
#3 some might flip this with #2, and depending on the specifics, I might agree. Pay down your high interest debt. What’s high interest? Anything over 8%. Maybe even 6 or 7.
#4 if you have an HSA, max that out, the limit isn’t even that high. If you make the contributions direct from your paycheck, you get to avoid payroll taxes.
#5 max out your Roth IRA. The limit is $5,500 per year, if you really needed to get at it, you could probably withdraw most of it without penalty. It’s money that will never be taxed again, and you’ll probably end up with much more pre-tax money than Roth money in retirement.
#6 head back to the pre-tax retirement account (401(k) or 403(b). Tax deferral is worth a lot. There’s a decent amount of room here; $18,500 per year as of writing. You may want to skip to the next before maxing it out if you have goals earlier than retirement.
#7 taxable investment account. This is apparently the best kept secret in personal finance. You’d be amazed how many people don’t realize you can take cash that would otherwise be in your checking or savings account and invest it in stocks, bonds, or funds. If you’re a high earner that needs to save a lot to get to retirement, you’ll need to get familiar with how this kind of account works.
If you can get all the way to the point where you get your 401(k) match, have an emergency fund, have no high interest debt, max your HSA, max your Roth IRA, max your pre-tax retirement account, and are saving in a taxable account, congratulations. You’re probably crushing the retirement checkpoints.