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Many people are unsure about their financial priorities: Should I invest or pay off my debt? Should I contribute to my work 401(k) or open an IRA? This guide will help clarify things by visualizing your financial priorities in simple terms.
Think of this as the “Ladder Method,” which helps prioritize your investments. However, this approach, as Reddit describes it, is a “retirement wrapper” that includes all of your finances: debt, emergency funds, and more. Plus, it helps you visualize everything. Below is a basic breakdown of each step, and you can follow the links for more detailed information.
Emergency fund: Start by building a safety net before tackling anything else.
401(k) contribution match: This is essentially free money, so take advantage of it if you can.
Debt: Paying off debt is crucial. High interest rates can harm your finances significantly.
Individual Retirement Accounts (IRAs): Maximize your contributions to IRAs if possible, as saving for retirement is key.
401(k): If there’s still money left, keep contributing to your 401(k). It may not be as flexible as an IRA, but you benefit from tax advantages.
Savings/Investments: After fully contributing to your 401(k), consider putting any remaining money into a savings account or taxable investment account.
Note: This guide uses an older income limit for 401(k)s. The current limit for 2015 and 2016 is actually $18,000.
You might not agree with every step for your specific situation. For instance, if you're planning to buy a home, you might prefer to direct your funds to personal savings (which is more suitable for a down payment) after maxing out your IRA, instead of returning to your 401(k). Naturally, your priorities may differ, but this guide provides a foundational understanding of personal finance 101.
