New Year’s Checklists: What Is Your Financial Priority List?

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Updated for 2017. You’ve worked hard and you have some money to put away for your future self. What should you do with your money? There is no definitive list, but each person can create their own with common components. You may also want to revisit it again every year.

You can find some examples in this Vanguard blog and see what I had down in this 2006 blog post. Here’s my current list:

  1. Invest in your 401(k) or similar plan up until any match. Company matches typically offer you 50 cents to a dollar for each dollar that you contribute yourself, up to a certain amount. Add in the tax deferral benefits, and it adds up to a great deal. Estimated annual return: 25% to 100%. Even if you are unable to anything else in this list, try to do this one as it can also serve as an “emergency” emergency fund.
  2. Pay down your high-interest debt (credit cards, personal loans, car loans). If you pay down a loan at 12% interest, that’s the same as earning a 12% return on your money and higher than the average historical stock market return. Estimated annual return: 10-20%.
  3. Create an emergency fund with at least 3 months of expenses. It can be difficult, but I’ve tried to describe the high potential value of an emergency fund. For example, a bank overdraft or late payment penalty can be much higher than 10% of the original bill. Estimated return: Varies.
  4. Fund your Traditional or Roth IRA up to the maximum allowed. You can invest in stocks or bonds at any brokerage firm, and the tax advantages let you keep more of your money. Estimated annual return: 8%. Even if you think you are ineligible due to income limits, you can contribute to a non-deductible Traditional IRA and then roll it over to a Roth (aka Backdoor Roth IRA).
  5. Continue funding your 401(k) or similar to the maximum allowed. There are both Traditional and Roth 401(k) options now, although your investment options may be limited as long as you are with that employer. Estimated annual return: 8%.
  6. Save towards a house down payment. This is another harder one to quantify. Buying a house is partially a lifestyle choice, but if you don’t move too often and pay off that mortgage, you’ll have lower expenses afterward. Estimated return: Qualify of life + imputed rent.
  7. Fully fund a Health Savings Account. If you have an eligible health insurance plan, you can use an HSA effectively as a “Healthcare Roth IRA
    where your contributions can be invested in mutual funds and grow tax-deferred for decades with tax-free withdrawals when used towards eligible health expenses.
  8. Invest money in taxable accounts. Sure you’ll have to pay taxes, but if you invest efficiently then long-term capital gains rates aren’t too bad. Estimated annual return: 6%.
  9. Pay down any other lower-interest debt (2% car loans, educational loans, mortgage debt). There are some forms of lower-interest and/or tax-deductible debt that can be lower priority, but must still be addressed. Estimated annual return: 2-6%.
  10. Save for your children’s education. You should take care of your own retirement before paying off your children’s tuition. There are many ways to fund an education, but it’s harder to get your kids to fund your retirement. 529 plans are one option if you are lucky enough to have reached this step. Estimated return: Depends.

I wasn’t sure where to put this, but you should also make sure you have adequate insurance (health, disability, and term life insurance if you have dependents). The goal of most optional insurance is to cover catastrophic events, so ideally you’ll pay a small amount and hope to never make a claim.

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  1. “There are many ways to fund an education, but it’s harder to get your kids to fund your retirement.”

    Important advice. A sad case was a family friend who paid his son’s education through law school (out of his income as an ACT bus driver in the 1970s). The son broke off all contact after getting his J.D. because of their strong political differences. In this case the parent’s home had a lot of equity and allowed them to enjoy a modest retirement by selling it and moving to rural Nebraska. I suspect that they might have preferred Bay Area weather if they could have afforded to stay there.

    • I know law school is expensive, but not expensive enough require a move from Bay Area to rural Nebraska. Maybe Bay Area to San Diego.

      • Not sure if you missed that the parents are the ones who moved. It’s sad that the father who worked hard to put his son through school, lost all contact with him, let alone no retirement assistance.

        • It’s sad, but not because of the finances.

          Financially speaking, the bay area is expensive enough that if you own a home in the bay area, you can slash 200k off the valuation and buy a similar house in most other parts of California. Unless “a lot of equity” is the price of the law school education. But if that’s the case, you’re in a bad part of the Bay and they’re better off in rural Nebraska.

          Sorry to get off topic, I’m done.

  2. “You should take care of your own retirement before paying off your children’s tuition.”

    Tuition bills come much earlier in life than retirement for 99.99% of America. It often comes earlier than mortgage completion as well. There is no one solution fits all, but expected timeframe of when you need to use savings is an important consideration.

    • Yes, but you should be on the right path. If say you have a $750/mo contribution set up that puts on you on track for retirement, THEN you can start a $250/month contribution to a 529 or similar plan. I’m not saying you have to retire first before putting any money towards college.

    • Scott think of it this way, if you are 30 and have a kid, they will be going to college in 18 years. You will be retiring in 30+ years. Thats 12+ extra years of compounding interest in a tax advantaged account for you and your family and eventually your child if you do well enough. Its much better than your child figuring out how to afford a nursing home or trying to fit you in their own home, there are programs for children to go afford college not so much for an elderly person to afford retirement.

  3. Great post!

    I would also add “contributing to an HSA” into the list. The triple tax advantages are awesome (no tax on contributions, no tax on earnings, no tax on withdrawals… As long as the money is used for medical/dental reasons). Primarily useful for youngsters or people who are generally in good health and aren’t expecting too much in healthcare costs. Great vehicle to start saving up for future healthcare costs. Some employers also contribute additional money on your behalf, and so that’s free money. It does require a high deductible health plan (HDHP).

    • Agreed, Health Savings Account are a good option to consider if available to you. You’d want to have a cushion first in case you start the HDHP and immediately hit upon some big healthcare costs.

  4. washerdreyer says

    Is prioritization between 4 & 5 just because of the increased range of options in an IRA as compared to a 401(k)?

    • I would say prioritization between (4) and (5) depends on your marginal tax bracket. If you are in a high tax bracket right now, it makes more sense to max-out the 401K before contributing to IRA or backdoor Roth.

      If you are in a low income bracket and expect to be in a higher bracket in future, it makes more sense to contribute to IRA before maxing out 401K.

    • It’s due to the portability to different brokers, the wide range of investments available across brokers, and the average 401k plan also has higher expenses and fees than what you could get in an IRA. The overall tax advantages are similar. You can usually roll a Trad 401k to Trad IRA and Roth 401k to Roth IRA eventually anyway.

      Between a Traditional and Roth, yes that depends on your current and future predicted tax brackets.

  5. Hi Jonathan, I’ve been a fan of your blog for ages!
    Do you know much about after tax 401k rollovers to roth IRAs? Basically contributing way more than you could before without the penalty. There’s been a lot of publicity about it, but I’m still confused why all the rules and regulations from the IRS. Maybe you could write a piece about it? Thanks!

    • I’ve looked into what people call the “mega backdoor roth” and will write about it – thanks for the suggestion. The potential crowd that can use it seems small but it is worth a look if you have the extra money AND your employer allows additional after-tax contributions AND they allow in-service distribution otherwise the Roth conversion limits might come back.

  6. I do not have access to a HSA account at work, but have regular medical insurance from my employer. How do I save money into a HSA? Can I open one on my own through a service provider? Please advise. Thanks.

  7. #7 (HSA) should be #4. It is better than a roth + 401(k) since you can deduct the money going in and withdraw tax free coming out if used for medical purposes. If you have an emergency fund built (#3) the HDHP is less of a risk, and once you build a balance in the HSA a portion of it becomes a targeted extension of said emergency fund.

    I think there is an argument to move the down payment fund ahead of maxing out the post-match 401(k). The house is partially consumption but allocating some resources to a better today versus a better tomorrow isn’t unreasonable, especially if the matched 401(k)+ IRA (+HSA?) have already been funded. But you noted that is a question of personal priorities.

  8. Laura Mirecki says

    Just wanted to congratulate you and your wife on the birth of your baby girl, Jonathon! I’ve enjoyed watching your family grow and your financial interests change over the year. I wish you continued success on your website and entrepreneurial adventure. Very inspirational. -Laura

  9. One item not on the list that may apply to certain homeowners might be “”see if you can cancel your Private Mortgage Insurance””. If you bought a home with a conventional (non-FHA) mortgage more than 2 years ago with a down payment of less than 20 percent, you probably have a PMI policy.

    With a couple of years of amortization under your belt, and with home prices in most areas of the country rising smartly over the past few years, if your equity stake is now more than 20 percent, you might be able to cancel that PMI policy. Check with your servicer for details; this may or may not require an appraisal (~$450) which could negate a chunk of savings in the first year, but after that, it’s pure savings you can surely put to better use in any of the 1-10 items in the list.

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