Making your money work for you will help you reach financial freedom, and these are all the 7 places your money should go when you get paid!
You should designate your money to go toward certain types of financial accounts so you’re maximizing saving and investing your hard earned money. This way, you’re making your money work for you so it generates more money for you later.
I’m all about paying yourself first, and this is all without having to stick too strictly to a budget. Because that’s like counting calories and I think making your money work for you this way is way more fun.
People who are wealthy give their money a job to do so it compounds and grows before they have to pay down their expenses. This is budgeting made easy.
1 – 401k with 19,500 under 50 or $26,000 if you’re age 50
Even before you see any of your paycheck money, the first thing you should do is usually automated with your employer when they do payroll. They can set up your workplace retirement plan, or 401k, to automatically take out your contributions before you even get paid. So what you should do if you work for an employer is to contribute as much as you can to the 401k, which often has an employer match. What I’ve experienced is usually a 1:1 match, and sometimes employers can be more generous like offering more of a money match if you contribute a certain minimum %.
IMHO I think contributing after-tax funds to a Roth 401k is best so you can eventually roll that over into a Roth IRA and then generate returns tax-free forever without RMD, potential tax changes notwithstanding. But you can also contribute pre-tax to the 401k so you get a tax break up front but pay taxes later during retirement.
2 – Checking
Then your paycheck hits your checking account, which you should definitely set up as direct deposit if you haven’t already because dealing with paper checks is just an extra unnecessary step.
Try to get a high interest yielding checking account if you can, but it’s OK if it isn’t. Think of your checking account as your launchpad to making your money do even more work for you if it isn’t earning much interest there. It can land there on payday but you can then move your money that same day so it’s more productive elsewhere.
In addition, [not advice and not sponsored] you may want to consider Tmobile Money checking account as that seems to surprisingly have some of the higher rates of between 1-4% right now.
3 – Savings with High Interest for 3-6 Emergency Fund and everything else, weddings, starting a business, life goals
If your money isn’t yielding enough interest in the checking, then move as much as you can into a high yield savings or money market savings account. The low interest rate environment is like a bunch of tumbleweeds whistling so it’s hard to come by much interest-earning accounts these days, so be sure to shop around.
I prefer to put all my income first in interest-bearing accounts so it’s already generating interest the day I get paid, and then I pay my bills later.
4 – Roth IRA
You can set up to automatically contribute or do lump sum, $6K and can do by April 15 of following year for current year. You could do self-directed like in Fidelity, Schwab, or Vanguard, or roboadvisor like Ellevest, Betterment, or Wealthfront.
5 – Health Savings Account (HSA)
If you qualify HDHP – $3,600 single, $7,200 family. Triple tax advantaged investing, it’s even better than a Roth because no taxes ever for med expenses. This is like doing retirement investing but for your medical expenses. Then when you’re in retirement you can just pay income tax and use it for anything, it doesn’t have to be medical related. Similar to a self-directed Roth, you can invest in just about any security so stocks, funds, and so on.
6 – Individual Investing accounts – if you have good buying opportunities and you’ve maxed out the tax-advantaged retirement accounts, then move money from your savings/checking into this account when your favorite stocks or funds go on sale in a good investment opportunity.
7 – Expenses including our bills and wants. I’m making sure that no matter what my spending is, I’m always staying in the black. This means, what’s in my savings and investing accounts are always generally going up because I keep my expenses to the minimum. By having a financial minimalist lifestyle, I don’t have to keep a strict budget because I get wealthier every time I have income coming in that far surpasses whatever my small expenses are.
Everything that doesn’t incur an extra fee, I put my bills and expenses on a credit card that I pay in full every month. Also I like getting cash back and miles for my spending, so often that’s another 1.5% to 5% of a discount on any of my every day expenses like groceries, utilities, and gas.
Notice how paying our expenses is the absolute last place our money goes? And this way we can rest assured knowing our money is working for us, even while we might splurge a little bit once in a while. But it’s OK because we’ve already set ourselves up to compound our money for maximum financial success!
I look forward to making more investor friends! Add me on Instagram: michellemarki!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.