Moving Money Around

Having extra money is a good feeling, having it in the right places is even better. Once you get paid you should be distributing your money into the proper types of accounts to make the most of it. That way you can make your money work for you as much as you work for it.

It’s not just savings you should be moving your money to. You should also be thinking of your retirement. Like putting some of it into a 401(k), Roth IRA, and then investing the other remainder into a Taxable brokerage account.

Checking Account

Your checking account should only be used to pay your bills with. It’s not an account you use to save money. If you keep all your money in your checking, you won’t be taking advantage of high interest rates offered by a High Yield Savings Account (HYSA).

I’m not saying to keep the account empty. You should at least have 2 months of expenses in your checking account. That way if you have recurring bills you won’t risk over drafting your account.

Savings Account

A HYSA account. Not talking about the ones with the big banks. These accounts pay laughable interest rates compared to a HYSA. You should have your emergency money in this account. A recommended amount is 3, 6, or 12 months of expenses based on your risk tolerance. Many online banks offer this type of account and you can sign up easily.

Keep in mind that these accounts might have rules, or restrictions. Plan accordingly. Usually HYSAs only allow 6 withdrawals a month. This is a federal regulation not a bank rule, sometimes going over this limit just results in fees being charged.

As to rules some might only offer the higher APR with account minimums. So sign up for a bank that fits your budget and what suits you best.

401(k)

This should already be contributed to before you get paid. You can always contribute more but I always do as much as the company will match. If you don’t have a traditional employer, or your employer doesn’t offer a retirement plan you can always contribute to a traditional IRA. If you do contribute to an IRA make sure to deduct the contributions off your taxes! (do this if your employer does NOT offer a retirement plan or it will have some limitations).

Roth IRA

These contributions are your after tax money, so money you already paid taxes on. This is supplemental to a 401(k), except with this account your earnings will all be tax free when you retire. There are limits to the contributions per year so once you reach those limits you can decide to move your extra money into other types of accounts. There are also withdrawal restrictions. You will be penalized and taxed if you withdraw any profits from this account before retirement. You can always withdraw your contributions, but the catch is your contribution limit will remain the same. For example if you met the yearly limit, then pull money out you won’t be able to put it back into the Roth IRA if you change your mind.

This is a good account to have so you can have extra tax free worry free money when you retire. In retirement 401(k) distributions are taxed like income. So pulling for example 100k. 50k from your 401(k) then 50k from your Roth will only result in you paying taxes for 50k.

Taxable Brokerage Account

The last step to having your money work for you. Investing in a taxable brokerage account has no limits or restrictions. Just keep in mind that any realized gains will be taxed at the end of the year. So if you make money from selling stocks in a Taxable Brokerage Account you will have to pay taxes on that money.

Usually I’d say to exhaust your other options before you invest into a Taxable Brokerage Account, but sometimes contributing just a little a month can increase your morale for saving money. It can even be small amounts like $25 a month.

Final Contribution

Save money efficiently by looking at all your options for saving. Have enough for your monthly expenses in your checking account. Weigh all your options and shop around for savings accounts. Take advantage of high interest rates by putting it in a HYSA, take advantage of tax breaks and company matches in 401(k) contributions, take advantage of tax free growth in a Roth IRA, and take advantage of the freedom of a Taxable Brokerage Account.

Thank you for reading. Good luck and see you next Sunday,
– Pablo