Where You Should Put Your Money (And When)

One of the biggest problems people have when it comes to money is figuring out what to do with it and when. Should you save up an emergency fund or pay off your debt first? Should you max out your 401(k) or invest more into your taxable brokerage account? Is it better to pay off your home early or invest your excess savings in stocks?

While there is no right answer to these questions, having a financial philosophy to rely upon when thinking about them is essential. This is what we will discuss in this post—where you should put your money, or what some have called the “financial order of operations.” I’ve been asked about this many times before, so I decided to provide my detailed answer. While the ideas discussed here won’t work perfectly in every situation, they will allow you to think more clearly about how to use your money in the future.

With that being said, let’s dig into the overarching idea behind getting the order right in your financial life.

Getting the Order Right

I was watching Bill Perkins, of Die With Zero fame, on the Modern Wisdom podcast and he said something profound about getting the order of your life right:

Life is like Tetris…Let’s say you’re in heaven and you’re about to be born and God is like, “Here is the infinite bucket of experiences. Choose what you would like on your adventure.” And you’re like “Okay. This sex thing seems interesting…okay I wanna ride a bike. I wanna get a job. I wanna graduate. I think I wanna get married and have kids. Strip clubs? That seems interesting. I’ll throw in a couple of those.”

God goes, “Okay you can have them all on one condition—you have to get the order right.” So the people that do the marriage thing and have kids and then put the strip club afterwards don’t kind of get the high score. Because it interferes with it…or they put the heliskiing Mt. Kilimanjaro at 86. It’s kind of in the wrong spot, right?

Perkins’ point is that there are certain things that you can do in yours 20s that you can’t (or shouldn’t) do in your 70s and vice versa.

The same is true with money. If you save and invest your money at the wrong place at the wrong time, it can impact how you live your life in the future. For example, I’ve previously talked about how I probably shouldn’t have maxed out my 401(k) in my 20s. While that did set me up for a nicer retirement, I had to play catch up in my early 30s to save up money for a down payment on a house. Though I didn’t buy a house before interest rates increased in 2022, if I had wanted I probably couldn’t have since I put most of my excess cash into retirement vehicles.

This is just one example, but it highlights how you need to get the order right when it comes to your money. To this end, I have broken out where you should put your money (and when) based on the different stages of your financial life—the opening, the midgame, and the endgame. Let’s begin.

The Opening (Safety)

When you first start earning and (hopefully) saving money, your primary goal should be to get to a place of safety. You need to avoid ruin at all costs. The reasoning is simple—when you have no money, any bad luck you have is amplified. When you are poor, one unfortunate event can get you off course. For example, if your car breaks down, you may not be able to get to work. And if you can’t get to work, you could lose your job. And if you lose your job…you see my point. Just a little bit of bad luck can create huge negative consequences when you don’t have any money. This is why you have to start your money journey by building an emergency fund.

Get an Emergency Fund

When it comes to saving for an emergency fund, the most common follow-up question is: how much do you need to save? Should the amount be fixed or based on your overall expenses? I’m a fan of doing it based on your expenses because everyone’s lifestyle is so different. For example, if you have children, your emergency fund should probably be a bit bigger than someone who doesn’t have children, all else equal. If finding a similar paying job would be hard for you, you should have a bigger emergency fund. If you have medical issues, you should have a bigger emergency fund. And so forth.

Regardless of your situation though, your emergency fund should cover at least three months of living expenses. This seems to be the minimum amount of money that everyone should have in case they get into a financial bind. Of course, no emergency fund is 100% foolproof. Even the best laid plans can still fail. However, your emergency fund isn’t there to account for every emergency, but to minimize the impact of most emergencies.

Pay Down Your High Interest Rate Non-Mortgage Debt

After setting up your emergency fund, your next step should be to pay off any high interest rate non-mortgage debt. What is considered a “high” interest rate? In general, I’d say anything above 5%, but it depends on the level of interest rates in the overall economy. For example, if 1-Year U.S. Treasury bills are paying 10%, then you’d be better off investing your money in a 1-Year T-bill (and paying taxes on the interest) than pre-paying a student loan charging you 5.25%. However, if 1-Year T-bills are paying 5%, then you should definitely pay off your student loan first.

As a result, anything that isn’t mortgage debt and has a rate above 5% should be paid off as quickly as possible. Why are we leaving mortgage debt out of this? Because your home equity is illiquid. Every extra payment you make on your mortgage gets locked away in your home’s equity. Yes, you can get a home equity line of credit (HELOC) to access some of this, but there are some serious risks involved with this strategy. In general, I am against paying off mortgage debt early (most of the time) because we should value our liquid dollars more than our illiquid home equity.

Lastly, paying off high interest rate debt should be done even before you start saving for retirement. I know that this is controversial for some, but my reasoning is simple—we don’t know the future. We don’t know how the market will perform. But we do know that you will have to make those high interest payments. It’s the only certainty we have in this scenario.

Of course, paying off your high interest debt sooner could mean missing out on free money (i.e. the retirement match in a 401(k)), but I’d rather you do that than stashing away money into less liquid retirement accounts.

Overall, the beginning of your financial journey is about reducing risk (with an emergency fund) and removing things that are slowing you down (high interest non-mortgage debt). It’s about finding financial safety. Once you’ve established this safety, you can then move onto the next stage of your financial life—fulfillment.

The Midgame (Fulfillment)

Unlike the opening of your financial life, which is about preventing bad situations, the midgame is about getting more enjoyment out of life. That means saving for your future and meeting your life goals. This stage is all about fulfillment.

Contribute to Your Retirement Accounts (Up to the Match)

Now that you have an emergency fund and you’ve paid down your high interest debt, the next step is to contribute to your retirement accounts. This means contributing to your 401(k) and getting the employer match (if you have one), or contributing to an IRA (or both). The idea here is to start saving for your future when you will be unwilling or unable to work. I am less worried about the exact amount you save and that you save something to ensure that you have some financial resources to rely upon in retirement. 

Save For Your Goals (Down Payment on House, Wedding, College Fund, etc.)

After you’ve started saving something for your future self, you can now focus on saving a bit more for your present self. Whether that means saving up to buy a house, paying for a wedding, or saving for your children’s college fund, this is where most of life is lived. Even if you don’t have a specific goal in mind at the moment, you should be putting after tax money into a brokerage account in case one materializes.

This is where I messed up when I was in my twenties. I said, “I don’t want a house right now so I might as well put every extra dollar I have into retirement accounts.” My lack of forward thinking forced me to play catchup in my 30s when I should have known better. In the grand scheme of things this isn’t that bad of a “mistake” but it is an example of getting the order wrong.

Treat Yourself & Others

While many financial gurus might tell you to pay off your debt or max out your retirement accounts at this stage of your financial life, I’m not one of them. In fact, if you’ve gotten to the point where you can save for your retirement and your big life goals, then it’s time to treat yourself and others. This could mean buying something nice for yourself, getting gifts for people you know, or contributing to those you don’t (i.e. charity). 

This is where some of those in the FIRE movement mess up in their financial journey. They get so obsessed with reaching FIRE that they forego any enjoyment of life to hit a number. There’s nothing wrong with trying to retire early, but if you don’t know why you are retiring early and what you will do with your life when you do, then what’s the point?

I also think this is the point in peoples’ financial lives that is most overlooked. Maxing out your 401(k) is very concrete and measurable. Making sure you are enjoying your life isn’t. So before you go full speed ahead to maximize your wealth accumulation, ask yourself whether you are enjoying the journey thus far.

The Endgame (Aspiration)

Now that we’ve looked at getting fulfillment out of your financial life, the final section of what to do with your money (and when) is concerned with aspirational goals. This is the financial endgame.

Maxing Out Your Retirement Accounts

Assuming you’ve been able to save for retirement and reach many of your financial goals, the end game is about going above and beyond. It’s at this point that you can start maxing out your retirement accounts, if you choose. By maxing out your retirement accounts, you can ensure a much higher standard of living in your golden years. More importantly, since these accounts are shielded from capital gains taxes (and, in many cases, income taxes), maxing out your retirement account will allow you to play tax games in retirement that could lower the amount you pay to federal and state governments.

Though I’ve written previously on the downsides of maxing out a 401(k), most of my critique was on the lack of flexibility which prevented me from saving for my life goals (e.g. down payment, etc.). However, there can be lots of great reasons to max out, with the number one reason being tax savings. For example, if you are working in an area with high income tax (like NYC) and believe you will retire in an area with low or no income tax (Florida), maxing out can be great. In doing so, you will be able to avoid New York’s ~6% state tax and ~4% local tax on all of your 401(k) (or IRA) contributions when you pull the money out (as a distribution) in Florida.

Pay Off Your Remaining Debt

After maxing out your retirement accounts, one of the last things you can do is pay off your low interest debt. While many people are not fans of debt at all, having low interest debt can be quite beneficial, especially if you can earn more elsewhere. The book that changed my view on debt is The Value of Debt in Building Wealth. The book basically argues that debt can be a good thing if it is used responsibly, and I agree.

Having low interest rate debt is not as bad as it seems and can provide you with optionality that you may not have initially realized. If paying off all of your low interest debt earlier will make you feel better psychologically, then do it. However, if a little low interest debt doesn’t make you lose sleep at night, then I’d make my minimum payments and see if I could earn more elsewhere.

Build Your Legacy

Lastly, after you’ve saved for your life goals, maxed out your retirement accounts, and paid off all your debt, you can focus on building your legacy. This could mean supporting your family, larger scale philanthropy, or starting a business you’ve dreamed about. Whatever it is, the idea is to focus on the things in your life that are purely aspirational. You’ve met your basic needs, so now you can shoot for the stars.

Of course, you don’t have to wait to this stage in your financial life to chase your aspirations. But, if you happen to find yourself here, you have to ask yourself: why not? Why shouldn’t you use your wealth to build something you’re proud of? Why not create a legacy?

Of course, legacy will mean different things to different people. Some will want their name on a building. Some may want to win a prominent award. Some may want to impact their local community. There is no wrong answer here, but thinking about how to build your legacy is one of the ultimate freedoms that wealth can afford you.

Now that we’ve looked at the aspirational part of our financial lives, let’s wrap things up by discussing why it all matters.

The Bottom Line

When it comes to where you should put your money and when, opinions vary. You may agree with some, but not all, of what I’ve said. That’s fine. There are plenty of prominent financial gurus who have thought about this problem and come to different conclusions. For example, if you asked Dave Ramsey where you should put your money (and when), he would give you his 7 Baby Steps:

  1. Save $1,000 for your starter emergency fund.
  2. Pay off all debt (except the house) using the debt snowball.
  3. Save 3–6 months of expenses in a fully funded emergency fund.
  4. Invest 15% of your household income in retirement.
  5. Save for your children’s college fund.
  6. Pay off your home early.
  7. Build wealth and give.

The 7 Baby Steps are a great framework for thinking about this problem and share many common elements with how I would solve this problem as well. However, my list for where you should put your money (and when) is a little different:

  1. Build an emergency fund (3 months of expenses minimum)
  2. Pay off high interest non-mortgage debt
  3. Save in your retirement accounts (up to the match, if applicable)
  4. Save for your goals (home, wedding, children’s college, etc.)
  5. Treat yourself & others
  6. Max out your retirement accounts
  7. Pay off your remaining debt
  8. Build your legacy

Each of these steps works because it falls within a core theme of our financial lives—safety, fulfillment, and aspiration. And I know that if you follow them all, you will have lived a great financial and non-financial life. After all, what more can you ask for?

Thank you for reading!

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