How do you know if you’re putting your money in the right places? It’s a broad, overwhelming, yet common question. The good news is that the answer can be straightforward once you know all the components. 

First, you need to consider the actual places of where to put your money, like in savings and checking, retirement savings vehicles, and other investment accounts. Then, you figure out how much and when to put money into those different places. 

There’s no one-size-fits-all set of instructions on where to put your money, but you can follow some universal steps to make sure you’re setting yourself up for success.

How to Structure Your Cash

When structuring your cash, keep simplicity in mind. The most fundamental buckets for your cash, and the very first accounts you’ll open (you likely have them already), are a checking account and a high-yield savings account. By “high-yield,” I mean a bank account that pays you a competitive interest rate on your savings. In times of higher interest rates, these banks can pay between 1-2% interest. Online banks, like Ally, Capital One and Marcus, tend to pay higher interest rates on their savings account, which vary depending on the Federal Reserve interest rate. At the time of this writing, interest rates are still low, and your best yields are still somewhere around 0.5%. NerdWallet is a robust resource for comparing options.

Use the checking account for paying bills. As a general guideline, your checking account will have enough cash to cover the next few months of expenses. 

The savings account is your “cash reserves” or emergency fund, which you ideally build up to about six months’ worth of your expenses. You can save more (or a bit less) depending on what makes you feel comfortable. Any cash beyond your emergency fund will be funneled into other investments (I’ll talk about this more in the next section). To save toward your target level of emergency fund savings, consider setting up automated direct deposits from your paychecks or a recurring transfer from your checking account. 

In addition to the emergency fund savings account, you can open a second savings account specifically for “fun stuff,” like vacations. Say you do $5,000 worth of traveling each year. Set an annual target of $5,000 for your “fun” account, and decide on the most comfortable way to fund it. This could mean plunking down a lump sum right away, or spreading out the savings with a recurring transfer from your paycheck or checking account. 

If you’re self-employed, open an additional savings account for estimated tax payments. Divert the estimated percentage of taxes you’ll owe from all income into this savings account (usually about 30% to be safe, and you can use SmartAsset’s free income tax calculator to help get a rough sense of what you’ll owe). Pay your taxes out of this account. It’s much safer for your finances to keep your estimated taxes separate from your personal funds.

If you’re a homeowner, you may want to open an additional savings account designated solely for home projects and repairs, especially if you want to make sure you don’t go too over budget and dip into money that’s needed elsewhere. Use this account to write checks to contractors or cover other large home project expenses. Again, it’s up to you to decide if it makes sense to sweep a chunk of money over to this account right away or build it up gradually over time. 

It may seem like a lot of accounts, but they will help you stay organized and set up your finances for both resiliency and growth. With most online banks, it’s as easy as a click of a mouse to open a new account, and you can give them helpful nicknames, like “Slush Fund” and “HGTV Project Fund.” Aside from the necessities like estimated taxes (if applicable), you decide what your targets are for each and how fast you want to/can get there, which will inform how much you need to save. Also, depending on your financial situation, it may take quite a bit of time to fill these buckets up to their ideal levels, so have patience. Setting up these accounts is much like installing garden beds: They provide the foundation before you start planting the seeds of growth. 

How to Structure Your Long-Term Investments

Once you have a good handle on your cash accounts, it’s time to look at your longer-term investments. This is where the landscape of options gets more complicated. 

If you have something like a 401k through your employer, check to see how much you’re contributing to it. The maximum amount you can contribute to a 401k in 2022 is $20,500 ($27,000 if you’re age 50 or older). If you can manage to contribute the maximum each year, fantastic. Otherwise, contribute as much as you comfortably can. If you’re self-employed, you may have other types of investment vehicles that make more sense for you, like a Traditional IRA or Roth IRA. Although it differs for everyone, a healthy range for long-term savings is 15-20% of your annual income. 

Either along with, in addition to, or in lieu of (if you don’t have the options) those tax-advantaged, long-term investments, put your money to work in a taxable brokerage account. Unlike 401ks and IRAs, the taxable brokerage account allows you to withdraw funds at any time, making it a flexible option for both near-term and long-term savings. Coming up with the actual investment plan for the taxable account requires some strategy and depends on your goals and financial situation. We find that the taxable brokerage account can be the biggest portion of a household’s nest egg because of the unlimited contributions, versus retirement accounts that have limits. 

If you’re saving for future college tuition, you can also consider contributing to a 529 plan. A 529 plan is an investment account that grows tax-free and can be withdrawn tax-free as long as it’s used for qualified educational expenses. We always recommend making sure you don’t let a 529 plan impede your ability to save for your own future needs.  Unlike a taxable brokerage account, which you can draw upon at any time, taking money out of a 529 for anything other than education comes with a penalty. We’re also uncertain about how much school will cost in the future and to what extent your loved ones will need the funds.  

To Summarize

Simplify your cash structure by using one checking account to pay the bills and a high-yield savings account to hold your emergency cash reserves that could cover about six months of expenses. Open additional savings accounts such as a travel/fun account, an estimated taxes account, or a home projects account if it’s necessary for your financial situation. For the long-term, contribute as much as you can into your tax-advantaged retirement account(s) (both according to your comfort levels and the account rules). Also consider investing in a taxable brokerage account as a flexible, long-term savings option. 

Of course, how this all works in reality is nuanced, especially as life changes. Relationships may add complexity to this picture, jobs may come and go, income will fluctuate, and financial goals will change. But overall, if you have the bones in place, you’ll have a strong foundation to work from as time goes on. 

Read More: Your Personal Cash Flow Management System

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