Building an emergency fund according to the 3-6-9 rule, contributing to your 401(k) at work, paying down college debt… getting your head around all of the money stuff you NEED to know (and actually understand) to create a solid financial future can be seriously overwhelming. Adulting is truly tough, which is why we were so stoked to discover a brilliant color-coded chart that showcases the financial accounts we should all set up and how much money to put in each. To truly understand it all, we talked with Matt Lebel, the author behind the smart newsletter from personalfinanceladder.com. Read on for his advice, which explains how to move along by following each step until you’re ready for the next one.
STEP 1: BUILD YOUR EMERGENCY FUND
Matt says, “Make sure you have an emergency fund with *at least* three months of expenses. Put this in an Ally Bank savings account (one percent interest rate) and don’t ever touch it unless you lose your job or need it for medical reasons.” If three months of savings doesn’t feel like enough, consider basing your emergency fund on the 3-6-9 rule. Figuring out where you’re at will help you save up the right amount.
STEP 2: CONTRIBUTE TO YOUR COMPANY-MATCHED 401(k)
Does your company offer 401(k) matching? If so, jump on it! Matt tells us, “If your company offers a 401(k) contribution match, contribute just up to the amount that they’ll match for the calendar year.” For example, “A 50 percent match up to $2,000 means that you should contribute $4,000 to reap max rewards of the benefit.”
STEP 3: PAY OFF HIGH-INTEREST DEBTS
As we’ve learned, having heaps of debt coming out of college or after moving to an expensive city while starting out along your career path is way too common. The color-coded chart ranks paying off high-paying debts as an early step, suggesting that you tackle high-interest items first, like credit cards.
Matt notes, “For loans with rates under 4 percent (student loans, etc.) it’s often more tax-efficient to pay the minimums on the loans and take any extra money to move to the next step on the ladder (IRA contributions) where you’ll likely see higher returns.” Have debt anxiety? Matt says it’s totes okay if you prefer to pay off all of your debts before moving along.
STEP 4: CONTRIBUTE $5,500 TO A ROTH IRA
A Roth IRA (not to be confused with a Roth 401(k)) is an Individual Retirement Account that you can open up outside of work. Basically, the money you contribute to it is post-tax, which Matt describes as money you’ll chip in after you’ve been paid. “It’s just like how you’d deposit money into a savings account on payday,” he explains.
He instructs, “To open a Roth IRA, call Vanguard and ask them to walk you through the process of opening an IRA. They’re super helpful and there’s no fee for this. Note that there is a $3,000 minimum opening investment.”
Don’t have at least $3,000 socked away? Don’t feel discouraged. Matt tells us to go to Betterment, where you can start with as little as $50 and do it all online without having to talk to anyone. “Once you hit $3,000, you can consider moving to Vanguard, which will save you 0.25 percent in fees/year.”
STEP 5: CONTRIBUTE UP TO $18,000 TO YOUR 401(k)
By now, you may or may not already contribute to a company-matched 401(k). Once you’ve reached this almost last step, chat with the HR person at your office to enroll in the company’s 401(k) plan. You’ll have a few options to consider when signing up:
Traditional vs. Roth 401(k): “Pick Traditional,” Matt says.
Deferment Percentage: “This is a fancy way of saying, ‘How much from each paycheck do you want to contribute before tax?'” Matt explains. Choose a percentage that you feel comfortable with.
Fund Selection: Choosing your fund selection is like answering, “Where should we invest the money?” Matt suggests that you choose a “target date fund” for simplicity OR opt for a fund that follows the S&P 500.
STEP 6: EXPLORE OTHER INVESTMENT OPTIONS
If you’ve made it this far, a massive kudos is in order. Use any leftover cash to save for a house down payment, buy bonds or even put some money in an app like Robinhood. And never forget to treat yourself either — investing is an excellent idea, but enjoying your hard-earned cash is important too.
Want more info about investing your cash? Tweet us your burning money questions @BritandCo!
(Chart via Reddit, Photos via Getty)