If you put $1 away at age 20, that dollar would be worth $21 by age 65, assuming an average 7% return over the years.If you wait until 30 to invest that same $1, it will be worth $10.68. Start at 40 and you will have $5.43.Wait until you turn 50 to invest that same $1 and you’ll get a measly $2.76.
So a dollar invested at age 20 is nearly twice as productive as a dollar invested at 30, and 7.5 times as powerful as a buck that gets put to work at age 50! If you have already started saving money, the time to start is today. Every day that you wait is costing you financial peace down the road. Keep in mind that you need to have a plan to get the most out of the money you save. A great blueprint for doing the most with your savings is the hierarchy of investment savings, which outlines where to put your money and in what order.
Hierarchy of Investment Savings: From Top to Bottom
Start at level one and work through this list to start and build a solid plan for your money.
Level 1: Emergency Cash Savings
At the very top of your hierarchy of investment savings should be your emergency cash savings. The amount of cash you have on hand should be able to cover three to six months of fixed expenses and should be held in a money market account, a high-interest savings account, or in other very liquid investments. Use this money only for true emergencies, such as job loss or large medical costs.
Level 2: Short-Term Cash
Your next level is for short-term cash which should cover expenses coming due in one to three years. This should not be confused with emergency savings. This money should be used if you have a known large expense coming up in the next 12 to 18 months, such as a down payment on a house or a new roof. It doesn’t make sense to have your emergency fund wiped out due to a planned financial event, even if it’s a year or year and a half away.
Level 3: Make the Most of Your Employer’s 401(k) Match
You should strive to make your 401(k) contributions at least equal to what your employer is willing to match. For example, if your employer will match 6%, you should contribute at least 6% yourself. If you’re unsure of what the minimum contribution is to qualify for the full match, your human resources department or plan administrator should be able to help.
Level 4: Roth IRA
Next, start funding- and try to fully fund- a Roth IRA. Contributions are made with after-tax dollars and can be withdrawn at any time. Be sure to know how much you can take out without paying a penalty. Once you reach 59 ½, all withdrawals are tax-free. What’s more, unlike a traditional IRA that requires minimum withdrawals at age 72, there is no mandatory distribution age with a Roth IRA.
Level 5: Max Out Your 401(k)
After funding your IRA, go back and max out your 401(k). If you can’t afford to make the full maximum yearly contribution, think about how you can increase the amount of money you put into your 401(k) over time. For instance, you may be able to increase your contributions automatically each year. If that increase is done at the same time you receive a pay raise, you may not even miss the extra money coming out of your paychecks.
Level 6: Taxable Investments
If you have done all of the above and still have money to save, you can put those funds in a brokerage account. Whether you manage your money or have someone else manage it, be sure that you have a diversified portfolio that will earn dividends, interest, and distributions. When looking at online brokerage accounts, look at the range of investment options they offer as well as the minimum investment requirements and fees. If you don’t have a lot of money to invest, you may want to stick with low-cost, tax-efficient exchange-traded funds to stretch your money further.
