I have personally spoken with many individuals who are interested in improving their financial health pertaining to Investing and Savings, but have not considered why they want to do so (besides the very wide reaching “I would like more money” because who wouldn’t right?)

These questions can highlight and guide the next steps in a financial journey and to define where in the personal financial journey and independence path you are! Let’s talk about Investing and Savings!

Are you planning for something specific and actionable for investing and savings? Some examples include:

• Retirement
• Mortgage down payment
• Personal savings and peace of mind

Budgeting and planning?

• Do you know how much you make and your spending habits well enough to budget?
• Are there set percentages you delegate for specific use?

Savings

• Do you have six months worth of personal expenses in a high yield savings account (HYSA)?
  • Six to twelve months of monthly expenses is the landmark to cover any emergency that can occur without financial burden and without relying on credit or loan for the expense.
  • These funds are specifically for emergencies only.

Debt*

• Do you have high interest debt (greater than 10%)
  • Examples: credit cards, payday loans, or other high interest loans
• Do you have medium interest debt (between 5-10%)
  • Examples: Student Loans, Car loans
• Do you have low interest debt? (5% and lower)
  • Example: Mortgages are often considered low interest or lower priority debt as it will take some time to payoff but is an asset which usually builds equity over time.

*A general rule of thumb is to prioritize high interest debt payoff first over medium interest debt, and medium interest debt over low interest debt. There are some schools of thought which prioritize investment over low interest debt depending on the value of returns of investments.

However, it is important to keep in mind paying off debt is a guaranteed way to increase the funds you have available to you as they no longer drain monthly income with payments, where investment returns are subject to year to year fluctuations. But it is a subject of contention amongst the financially savvy for investing and savings.

Investment

• Do you already have an investment account? For what reason do you invest?
  • Examples: 401k, 403b, IRA, Roth IRA, HSA, Taxable brokerage account, etc.
• Automation
  • Are your investment and savings goals automated? How much input or attention does it require from you? Can you set it up and (mostly) forget about it?

There are two common schools of prioritization: The “Debt snowball” or “Debt Avalanche”

Payoff of lowest balance loans first (Snowball)

The debt snowball prioritizes paying off smaller debts quickly regardless of interest rate. This allows psychological wins of accounts being closed by paying them off fast early and taking the funds put towards those accounts towards higher balance debt once paid. This focuses on human psychology to maintain a financial plan, but does end up costing a bit more in interest payments over time.

Payoff of highest interest loans first (Avalanche)

The debt avalanche prioritizes paying off high interest loans first, regardless of the total amount owed. This may take some time to pay off loans (you pay the minimum on all loans except for the highest interest) but will save money on interest payments in the long run as the interest rate on the outstanding decreases. This focuses on financial wins and will pay less money in the long run, but may be harder to stick to if your highest interest rate loan is also one of the largest.

Neither method is incorrect. Both have their merits. Either form of debt payoff is completely acceptable. Just understand the benefits you are earning through all the work to pay them off for the sake of your investing and savings journey!

In addition, for those of you who may be in the early stages of financial planning and personal finance development, do some research on budgeting, HYSA, and investment accounts prior to taking the word of random thoughts of others – having some baseline knowledge will aid in critical thinking skills on the types of investments or plans which might be proposed.

Some useful definitions may include:

• Asset: positive valued owned commodity.
• Equity: value built on an asset over time.
• Liquidity: access to your money when you want it.

An account with a financial institution. This account often has an interest rate which trends the cost of inflation. It is not designed to make money, but to diminish the loss of value due to inflation, while still allowing liquidity 

Tax sheltered accounts include 401k, 403b, IRA/Roth IRA, and HSA, among other examples.

A quick summary of each account:

401k

Employer sponsored retirement account. It must be offered by a place of work to contribute. Traditional 401ks allow one to contribute non-taxed funds into the account to withdraw later in retirement. (The option for a Roth 401k also exists and has similar stipulations to Roth IRAs for tax treatment)

This account often defaults to investment in a dated TRP (Thomas Rowe Price or T. Rowe Price – the company who designed the funds) fund delineated by an estimated year of retirement. These funds’ assets will be adjusted to be less risky as time passes and moves closer to the year of retirement dictated by the fund. For example, if an estimated year of retirement is 2060, a TRP 2060 would slowly reduce risk in a fund over the years of work until 2060, when the goal of retirees is often to maintain their investments and less about growing them due to higher risk.

However, funds in the 401k can also be managed by yourself if you wish, into other assets and funds. Taxes are due on the funds and growth when withdrawn and treated as income.

403b

Essentially a 401k, but provided by nonprofit organizations instead. There are some restrictions on the types of investments that are not allowed for this type of account.

Traditional IRA

Individual Retirement Account. Unlike the previous examples, this account is specific to an individual and does not require an employer to sponsor for contribution. However, you can only contribute with earned income with respect to investing and savings. A traditional IRA tax implications are similar to a traditional 401k – taxes are assessed when the funds are withdrawn.

Roth IRA

Roth IRAs are a little different from Traditional IRAs. Funds are taxed when they are put into the account. However, no taxes are assessed when they are withdrawn. This includes any investment gains made throughout the lifetime of the account, assuming the account has been owned for five years or more.

Please see my previous post on IRAs here for more information about these powerful investment accounts!

HSA

Health Savings Account. This account requires a special integrated High Deductible Health Plan plus Health Savings Account (HDHP/HSA) to be offered by your employer. 

It is exactly as it says – the health insurance carries a very high deductible for extra services that are not preventative and is generally for those who have predictable, lower cost, or routine healthcare visits.

However, in exchange, you are able to contribute to the HSA account for every year you are enrolled into the HDHP. The HSA is an account to be spent on anything pertaining to health care, prescriptions, treatment, procedures, operations, dental, or optical expenses. There are many listings and examples of what are included under the umbrella of HSA eligible purchases and these can also be found very easily online.

There are multiple benefits to this account usually referred to as the “triple tax benefit”:

• Tax free contributions
• Tax free when spent on qualifying expenses
• Tax free growth on investments for compound interest

Lastly, reimbursements from this account can occur at any time, given you retain copies of receipts and expense reports for any out of pocket costs paid. Many individuals will pay out of pocket for the first few decades of the fund’s life and then reimburse themselves in a lump sum after compound interest has accrued.

For example, say you have eligible expenses tallying $10,000 and your fund has exactly that amount to pay the expense, but instead you pay it out of pocket and let the fund accrue interest for 30 years before your retire. 

$10,000 which accrues 6% interest for 30 years, with no additional contributions on funds, will grow to $57,434 over 30 years.

At this point, you reimburse yourself $10,000 for your earlier expense and retain $47,434 in the account. By delaying the withdrawal, you have gained the interest and still allow yourself the reimbursement of funds later. Kinda cool, right?

As a note about all these account types – there are different limitations on the amount that can be contributed each year to each account. These amounts are very clearly stipulated and easy to find by searching for them on the IRS website.

Initially, it is recommended to budget your monthly expenses for three months to understand where your biggest expenses are located. This allows you to truncate some of your biggest expenses if they are discretionary expenses such as travel, eating out at restaurants, or leisure activities, or to identify your biggest loan payments to pay down first and save some monthly income.

While you are budgeting for these three months, begin establishing an emergency fund in a HYSA – with a goal of $1,000 dollars to start. This is to establish a savings on a schedule, prove to yourself investing and savings is possible no matter how difficult, and to allow a cushion to prevent straying from the financial plan should life happen while you are pursuing your plan (which it will!).

For perspective, 59% of individuals in the United States do not have enough savings to cover a $1,000 emergency expense. That’s over 200 million people.

This is an amount you contribute to your retirement fund as a percentage of your income (often in low single digits such as 6%) in exchange for a “match” from your employer. This match is the employer giving you an amount into your retirement fund based on the amount you contribute. This is essentially free money from your employer just for contributing your money to a 401k. These funds from your employer become yours after they “vest” – the waiting period for the funds to become yours. Any contributions or growth on the funds you personally add, are always yours.

Company Match Example

For simplicity of an example, say you make $100,000 per year and you contribute 6% to your 401k. Your employer matches you for 1% for every 1% you contribute up to 6% (meaning if you contribute 6%, they will “match” your 6%), and it vests over three years.

This means you contribute $6,000 per year to your retirement and you gain an additional $6,000 from your employer from this match. For a total of $12,000 per year into your 401k. The employer vesting schedule is three years, so after working for the company for three years, all the funds contributed by the employer match, are yours.

Decide whether to focus on the highest interest loans or smallest balance loans first – Debt Avalanche or Debt Snowball – and stick to it. 

This is often the hardest step to begin and will test your dedication and resilience. However, once you pay off the first big debt, it will be a massive step forward in your personal finance journey and oftentimes accelerate the desire to forward the financial independence faster.

Increase your emergency fund amount to cover for a longer period of time. This will allow a more selective and independent lifestyle given any emergency circumstances such as job loss, emergency healthcare expense, or living cost increase such as unintended tax increases, mortgage insurance or property taxes, HOA adjustments, or even a broken washing machine!

Organize your debts based on the payoff method chosen and keep hammering away at them. This is often the step that will take the longest but will also feel the most rewarding on completion.

Many individuals will decide to establish this individual retirement account concurrently with medium debt payoff to begin contributing yearly. There is a limitation on the amount you can contribute per year and it applies to ALL IRA accounts of any type (both IRA and Roth IRA are additive).

Adjust your investment and savings to a rate of roughly 15% of pre tax income across all accounts. More if you have it to spare is perfectly acceptable, but 15% is a good threshold. Unless you are a very high income earner, this will not hit the thresholds for maximum contributions to all retirement accounts.

For perspective, the average savings rate of an individual in the United States in 2025 is only 5%.

A Taxable Brokerage Account is used for investing and savings into assets with money that is not earmarked specifically for retirement age. These accounts can be opened like a bank account and are organized by a brokerage on behalf of an individual or who opens it.

The funds can be accessed prior to retirement age (at any time) assuming the relevant taxes are paid when they are retrieved from an asset investment and also when withdrawn from the investment account.

Tax Implications For Taxable Brokerage Accounts

The funds are subject to capital gains taxes, income taxes, and dividends taxes, all of which will be reported to the IRS when filed per year.

Asset allocation becomes important for these funds to lower tax implications with regards to investing and savings. This is an entirely different conversation which I have discussed previously in this post here 🙂

If you are eligible for a Health Savings Account (HSA) through a High Deductible Health Plan (HDHP) at your place of work, contribute the maximum amount.

This is the dream place to be and is a very stable financial situation. If you can make it to this step, first of all, congratulations for how hard you have worked to get here! Some example choices you can debate include:

• 529 plan – For education savings for your children
• Early mortgage payoff
• Immediate savings goals (less than five years)
  • Vacations
  • Home renovations
  • New vehicles
• Early retirement – maximize contributions
  • 401k/403b
  • Roth/Traditional IRA

Utilize a Taxable Brokerage Account for any additional funds.

This is a fancy way of saying how long are you planning on saving or investing?

The general rule of thumb is to save for under five years and to invest if over five years. This is to give the market the chance to capitalize on a longer term average growth rather than depending on year to year growth with the potential to lose uncorrected by the averaging of many years of investment. However, this is ultimately a decision for the individual.

This is often the most difficult question to answer, especially when first starting out. It is not an easily accessible concept.

Risk is uncertainty. In the case of financial risk, often it stems from market fluctuations, debt and credit defaults, or operational failures.

There are layers of risk that relate to layers of operational debt and credit structures, which will be a future post.

Risk tolerance is asking, how likely are you to stick to your financial plan given all of the risk in your plan? Can you handle watching the market drop 30% one day to recoup over the next year and ultimately grow? Or are you someone who prefers to watch things slowly grow with less loss, but therefore less likelihood to grow over time?

Risk tolerance is an individualized experience.

Risk tolerance has both logical and emotional and needs to be evaluated multiple times over the course of a personal investment and savings journey.

Risk tolerance and potential for market gains, often have some sort of correlational relationship. As risk increases, the potential for market gains SHOULD increase. This is a wise investment practice to watch for a correlation between the two. Identifying your risk tolerance is key to understanding the right financial plan for you.

These are the few questions I tend to ask new individuals looking to optimize their current finances or to initiate new investment plans and a example financial plan for someone looking for a way to get started on their journey!

From my mind to yours!

~Jay

I enjoy sharing what I have learned through my own personal finance journey!