How to optimize your savings
Should you save for retirement or pay off your student loans? Open a 529 plan or save for a house? You’ve probably asked yourself any number of similar questions before, and the answers aren’t always straightforward.
We wanted to explain how Farther thinks about your financial order of operations — the order and the types of accounts in which you should save and invest to maximize your wealth and minimize your taxes. We’ll caveat that this won’t be ideal for everyone in every situation (that’s where talking to one of our advisors might come in handy), but it should be a solid starting point for just about everyone.
Start with a firm foundation
Setting yourself up for success means building a resilient foundation to protect yourself against backslides.
- Basic emergency fund — The most important thing to start with is covering the small emergencies that can put you in debt holes that are hard to dig out of. Begin by saving one month’s worth of expenses and learn more about the importance of emergency funds here.
- Employer match — If your employer matches your company retirement plan contributions, you’re leaving money on the table by not meeting that match rate. It’s like an immediate guaranteed return on your savings. Make sure you get it!
- Credit card debt — If you have credit card or any other high interest debt with a rate over 10%, you should pay that down next. Your return is effectively the interest rate on your credit cards, and it’s hard to beat a guaranteed return of that amount.
- Enhanced emergency fund — The last step in building your foundation is to expand the safety net of your emergency fund to six months worth of expenses. This should be enough to comfortably cover whatever curveballs life throws at you.
Max out your tax advantaged accounts
As important as how much you save and how you invest those savings are, where you invest them can have a huge impact on your wealth as well. Keep more of what you save by maxing out your tax-advantaged accounts.
