Ready to save? Do it in that order

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Experts agree that most people should have savings and investments in a variety of different types of accounts in order to save for different goals while taking advantage of specific tax benefits. Financial experts generally advise saving 10% to 15% of your income, but if that’s not possible right now, start setting aside as much as you can and increase the amount over time.

The exact order in which you save depends on your personal financial situation and goals, but when you start building your savings, the goals are: Make a habit of saving for the long term, take advantage of free money available through your company benefits and make the most of tax-free savings. To do this, you should focus your money on:

Put at least three months’ worth of living expenses in a secure, liquid account that you can access without penalties if you lose your job or have unexpected expenses, such as travel expenses. B. your car breaks down or your roof leaks. An emergency fund is usually held in a savings or money market account.

High-interest debt

While it’s not technically saving or investing, paying off high-interest debt should also be a top priority.

“I would prioritize any debt with an interest rate above 10%,” said Peter Hunt, board-certified financial planner and head of client services at Exencial Wealth Advisors. “That’s a risk-free return of 10%.”

Your workplace 401(k), up to any employer that matches

Money in your 401(k) account comes in tax-free and grows tax-free until you withdraw it in retirement. Many employers cover a percentage of employee contributions up to a certain level.

“Depending on the appropriate schedule [the company contributions could provide] an 80% to 100% return,” said Hunt. “You won’t beat that anywhere else.”

Contribute at least enough to offer an Employer Match. If your employer doesn’t have a suitable partner, you might want to focus first on paying off high-interest debt and building an emergency fund.

A health savings account

If you have a high-deductible health plan through work, you may also have access to a health savings account. (High-deductible health plans are defined as those with a minimum deductible of $1,400 for an individual or $2,800 for a family.) Money comes in tax-free, grows tax-free, and comes out tax-free when you use it for qualifying medical expenses.

“For tax reasons alone, it’s hard not to put the HSA at the top of the pile as the best tax-deferred vehicle you can employ,” said Christine Benz, Morningstar’s director of personal finance.

This year, you can put $3,650 into an HSA account if you have a high-deductible individual plan and up to $7,300 if you have a family plan.

Maximize your 401(k) or other retirement accounts

Once you’ve got your basic savings in place, you can start really adding to your retirement savings. You can deposit up to $20,500 in a 401(k) account. Even if you don’t have access to a 401(k), you can still save money for retirement through an Individual Retirement Account (IRA), although contribution limits are lower.

“I look at retirement accounts every year as a take or lose opportunity,” said Marcus Blanchard, board-certified financial planner and founder of Focal Point Financial Planning. “If you don’t use it to the limit, that’s a missed opportunity for the year.”

A liquid account for short-term savings goals

You should have money that you will need in the next three to five years, e.g. For example, for a home down payment or grad school payment, set aside in a secure account such as a high-yield savings account or an overnight savings account. The returns are low, but your capital is fairly safe.

“Generally, you want to save in short-term investment vehicles for short-term goals and long-term investments for long-term goals,” said certified financial planner Clark Kendall, who runs the Baltimore, Maryland-based wealth management firm Kendall Capital.

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Loans with lower interest rates

Again, paying off debt isn’t technically saving or investing, but paying off debt like student loans or car financing can improve your cash flow, improve your credit score, and give you more financial flexibility over time.

A taxable brokerage account

If you have money left over after funding your short-term goals and are on your way to your long-term goals, you can take the next steps in investing. A taxable investment account is a great place to put cash when you’ve exhausted your retirement accounts. “Here you invest for the long term, at least five years, but you have liquidity when you need it,” said Lazetta Braxton, co-CEO of 2050 Wealth Partners.

529 college savings

If contributing to your children’s college education is important to you, a 529 account is a great way to save. Invested money grows tax-free and can be withdrawn tax-free as long as it is used for qualifying educational expenses. Just make sure you’re first on the path to your own retirement and goals.

Correction: A previous version of this story misrepresented the definition of a high deductible health plan for individuals. Health plans for individuals with a minimum deductible of $1,400 are considered highly tax deductible and are eligible for a health savings account.

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