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The Savings Waterfall

Updated: Apr 12, 2022


Heavy Hitters:

  • Start by putting aside short-term savings for emergencies

  • Get in the habit of saving for retirement -- open a 401k with your employer and/or a personal IRA

So: you landed your first big job. Go you!! You're getting paid, feeling awesome…but what do you do with your paycheck?? We're here to help.

Maybe you've been told to put some toward savings, and some to spend. That's great! That's exactly what we are doing, just with a few more buckets to fill.

Start off with emergency savings. There are many ideas out there about how much to put toward emergency savings, with a common rule of thumb being 3-6 months of expenses. If you have high rent, car payments, high-deductible health insurance, or a pet, this fund might be bigger than if you don’t. This emergency fund gives you peace of mind that you can independently handle unexpected costs. Keep this fund in a high yield savings account.

Once you have built up those emergency savings (it doesn't have to happen with your first paycheck!), think about your company 401k contributions. This is a retirement savings / investment account that your company makes for you. Instead of you having to think about putting savings aside, your company will pull money from your paycheck each month to put in this account. Read more about retirement account options and how to invest them here (coming soon!). Some companies will even match the contributions you make to your 401k, meaning that they will contribute money toward your retirement as well. Since this is FREE MONEY, you want to be sure to contribute at least the amount that your employer will match to your 401k, so you can max out that free money!

Pay off debt. Prioritize high-interest debt, like credit card debt, which often has rates of 14-18% or higher. Get to know the other interest rates you have on outstanding loans -- things like your student loans, or your car loan. That said: it rarely makes sense to wait to pay off all of your debt to invest.

Contribute to your personal retirement account. In addition to your employer-sponsored retirement account, you can open up your own retirement account. Learn more about traditional vs Roth IRA accounts here (coming soon!). You can contribute up to $6,000 a year into these accounts, but you don't have to max that out every year. Remember: these accounts have tax advantages, so it's a good idea to contribute at least some amount to your long-term savings! You can open an IRA account through your brokerage, such as Schwab, Vanguard, or Fidelity.

So: you've filled your emergency savings account, maxed out your 401k employer match, paid off some high-interest debt, and started your personal IRA. These savings and investment strategies set you up for short-term changes and long-term security. Now what? Obviously, you need spending cash, so take a look at your personal budget and make sure you have enough to purchase what sparks joy (Monday cappuccinos are a must for me!). Anything left over you can put towards medium-term personal investments! For me, this is a place to experiment, explore what investments resonate with me, and learn about the markets. Learn more about creating your personal investment thesis here (coming soon!)

Now, you'll keep adjusting the amount put into each bucket over time. That's okay! Keep an eye on your personal spending and emergency savings and you'll be okay. Maybe you don't fill every bucket every time. Don't stress it, just do what feels empowering!



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