{"id":209,"date":"2020-08-12T13:00:00","date_gmt":"2020-08-12T13:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/how-to-prioritize-where-to-invest\/"},"modified":"2025-09-05T19:50:03","modified_gmt":"2025-09-05T19:50:03","slug":"how-to-prioritize-where-to-invest","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/how-to-prioritize-where-to-invest\/","title":{"rendered":"How to Prioritize Where You\u2019re Investing, and Why"},"content":{"rendered":"
\n

August 2020<\/h4>\n<\/div>\n
\"

For all intents and purposes of this post, this is your money. We\u2019re going to put these eggs in different baskets.<\/p><\/div>\n

\n

Welcome to part 2 of \u201cWhat to Do Once Your Emergency Fund is Stocked<\/a>,\u201d and get ready to put on your thinking cap. Today, we\u2019re diving into how to most strategically prioritize where you\u2019re investing (and why). <\/p>\n

At the risk of sounding like a stereotypical Internet Writer\u00ae, go back and read Pt. 1 if you haven\u2019t yet: What to Do After Your Emergency Fund is Fully Stocked<\/a>. Or, if your emergency fund isn\u2019t<\/em> fully stocked yet, check out How to Start Building Your Emergency Fund in 2020<\/a>. <\/p>\n

Phew. Self-promotion? Check. Moving on!<\/p>\n

Investment priorities<\/h4>\n

By now, you\u2019re probably convinced that investing makes sense. But \u201cinvesting\u201d is just about the world\u2019s broadest term, and believe it or not, there are a lot of ways to approach it incorrectly \u2013 and most of them are probably beyond the reasons you\u2019re thinking of right now. Most people are not investing $10,000 in a single stock and crossing their fingers; it feels silly and insulting to waste time advising against taking outsized risks to beat the market with picking individual stocks. <\/p>\n

Instead, let\u2019s back up a step. If the eggs pictured above represent particular funds to invest in, I want you to think about zooming out a level. We\u2019re no longer looking at which eggs, specifically, to pick \u2013 we\u2019re looking at the baskets<\/em> in which you can put those eggs.<\/p>\n

Basket #1: Your 401(k)<\/h4>\n

If you have access to a 401(k), 403(b), or 457 plan through your employer, congratulations \u2013 you have a basket with a $19,500 limit in which the IRS won\u2019t tax the growth<\/strong>.<\/p>\n

Ultimately, the reason everyone urges you to use your 401(k) \u2013 aside from the possible employer match \u2013 is not just<\/em> because they want you to save for retirement, but because of taxes. <\/p>\n

I used to wonder why everyone was so riled up about 401(k) plans. Can\u2019t I just \u201csave for retirement\u201d in a different account? <\/em>I\u2019d wonder. And yes, there are other options \u2013 but the 401(k) is special because it\u2019s a way for you to invest a sizable amount of money for the long run and not be taxed on the interest every year.<\/p>\n

PAUSE: Let\u2019s address the IRS-sized elephant in the room<\/p>\n

If you have yet to do so, read \u201cTraditional vs. Roth, Explained<\/a>.\u201d Sorry. I really thought the self-plugging was done, but here we are. This addresses some of the tax basics (emphasis on basics; I am not a tax expert) that underlie the logic in this article and will be a great place to start if you\u2019re fuzzy on the difference between Traditional and Roth retirement accounts.<\/p>\n

Back to the 401(k)<\/h4>\n

All that to say, the 401(k) is your tax magic school bus. This should be the first basket you visit before you even think about doing anything else if you have one. (Looking at you, 2017 Katie: Put down the iPhone and step away from the Robinhood app.)<\/p>\n

You likely (a) already have one and (b) already have chosen Traditional or Roth, so here\u2019s the big picture idea that\u2019s important:<\/p>\n

You need to contribute at least <\/em>up to your company match, but shoot for 10%<\/strong> or higher if at all possible.<\/p>\n

Remember how we\u2019ve already acknowledged that your emergency fund is fully funded? If you have your token $15,000 in savings hanging out somewhere safe, secure, and (hopefully) high-growth, you no longer need to be saving whatever percentage of your income you\u2019ve been contributing to your emergency fund every month.<\/p>\n

Let\u2019s say you make $5,000 per month and you had been<\/em> saving $1,000 of it. Now you\u2019re fully stocked for emergencies. That extra $1,000 that you don\u2019t need? Straight to the 401(k)! <\/p>\n

\n

One caveat<\/strong>: If your employer doesn\u2019t offer a match, the 401(k) is a slightly<\/em> less ideal first priority. It\u2019s still great (since 401k = $19,500 of investment opportunity that the Feds can\u2019t tax every year), but you have a lot less control over the fees you\u2019re paying in an employer-sponsored 401(k). <\/p>\n

The fees aren\u2019t a showstopper for people getting, say, a 6% dollar-for-dollar match, because the extra money the company kicks in will offset any losses you suffer from extra management fees, but it\u2019s something to be conscious of if you know you don\u2019t get a match. Some employers are cutting company matches right now since COVID hellfire is raining down upon company budgets.<\/p>\n<\/blockquote>\n

In any case, 10% is a healthy figure to aim for in a 401(k) plan. Until you can commit to 10%, I would pause on going any further. However, once you\u2019re comfortably committing 10% to your 401(k) and still feel like you\u2019ve got a little left over every month\u2026<\/p>\n

Basket #2: Your IRA (Individual Retirement Account)<\/h4>\n

If you\u2019re anything like most people I talk to, you probably just said one of two things:<\/p>\n

    \n
  1. \n

    What the hell is that? or<\/em><\/p>\n<\/li>\n

  2. \n

    But I have a 401(k). What do I need an IRA for?<\/p>\n<\/li>\n<\/ol>\n

    You need an IRA for the same reason you have a 401(k) \u2013 tax-free growth, baby. The IRA is a smaller basket \u2013 it only allows you to contribute $6,000 per year (as of 2020), but that\u2019s $6,000 per year that generates interest off which the IRS can\u2019t skim the top on an annual basis. <\/p>\n

    If you don\u2019t have access to a 401(k), this is the no-brainer next-best-option. A few things to note:<\/p>\n