Top Ten Places to Save Your Money
Many of us resolve to do less spending and more saving. If that includes you, here’s my updated list of the top 10 (OK, 12) places to save your money. And, as a bonus, I include 6 more from which I’d stay far away.
Best Places to Save
1. HSA
Nothing beats a health savings account. This tax-sheltered savings is only available if you have a qualifying high deductible health plan. If you’re eligible, it’s the best deal around as it’s a trifecta of tax-deductible contributions, tax-free growth, and tax-free distributions. Some employers make it a quadrifecta with a match to incent you to opt for this plan and that’s just more free money.
If you have other savings, don’t use the funds when you have medical expenses —keep them growing tax-free and use them far in the future for your older self. You can read more here.
2. ESPP
If you work for a public company that offers an employee stock purchase plan, maximize contributions to it. Immediately auto-sell your shares each period and, in most plans, you’ll lock in a minimum gain of 17+%. Yes, it’s taxable but that’s still hard to beat. You can read more here.
Better Places to Save
3. Your employer’s 401K
Not all 401K plans are great in terms of investment options and fees but you can contribute through payroll deductions which is a big advantage. Also, many employers offer a match and that’s free money you can’t pass up.
If you’re self-employed, contribute to a SEP-IRA instead.
4. Roth IRA
It’s always sensible to fund a Roth IRA. You can still contribute even if you have a 401K at work or a SEP-IRA. However, Roth IRAs have an income limitation so if your adjusted gross income is too high, you’re ineligible.
You can read about my upcoming class on everything to know about Roth IRAs here.
5. Back-door Roth IRA
This one’s a bit complicated so search the google tubes for the details but briefly, for those whose income is too high to be eligible to contribute to a Roth IRA, you can make non-deductible contributions to a traditional IRA and then convert the funds to a Roth without owing tax on the conversion. It doesn’t work if you have an existing traditional IRA balance for reasons I won’t explain here.
6. Mega back-door Roth 401K
A little-known feature of some 401K plans is allowing participants to make additional after-tax contributions, up to a total of $69,000 per year (as of 2024). You receive no tax deduction but these additional contributions can be rolled into a Roth IRA when you leave your employer or into a Roth 401K right away.
If you’re a high income earner and have maxed out contributions to your 401K and not eligible for a Roth IRA, this is like a super-charged, back-door Roth IRA contribution. However, 401K plans often do not offer this option.
7. 529 plan
If you have children, grandkids, or other relatives and want to contribute to their college education, a 529 is the best way to do so. It’s similar to a Roth IRA — the investment income accrues tax-free and you’ll pay no tax when you withdraw the funds for qualifying educational expenses. You can read more here.
8. US Treasury Inflation Bonds
The US Treasury offers two kinds of inflation bonds — Series I and TIPs. Each has plusses and minuses. TIPs currently yield more but they have worse tax treatment and are harder to understand; Series I bonds have good tax treatment and are easy to understand but there is a low annual limit on how much you can purchase and their rates are now lower than TIPs.
9. MYGAs
A Multi-Year Guaranteed Annuity is the insurance industry’s version of a bank CD. You hand over your money to an insurance company for a specified term (usually 3 years or more) and they return your money, plus the interest at the end of the term, or roll it over into a new MYGA. Generally, it’s a higher rate than a bank CD (though not FDIC guaranteed) and has better tax treatment as you defer the interest income until you redeem them. You can read more here.
Good Places to Save
10. Pay off loans
It’s never a bad time to pay off your loans. Start with the loan with the highest rate and work your way down. However, it sometimes makes good psychological sense to first pay off a loan with the smallest balance, just for the psychic satisfaction and sense of progress. Either strategy is a winner.
11. Invest in a taxable account
If the first 10 aren’t suitable for you, invest in a taxable account. Depending on your income and savings, a low-cost stock index fund may be the most tax- and cost-effective.
12. Give some money away
OK, this isn’t saving but if you’re thinking about donating some money to charity, a “donor-advised fund” may be the best way to do so. You donate the money to a fund you control and you can later designate the organizations to which the money is distributed. You’ll want to do this in a year when your income is high as you’ll get a tax deduction when you initially make the contributions to the fund. And, you can also donate appreciated securities and avoid any capital gains tax. You can read more here.
Bad Places to Save
Avoid these 6 “investments:”
1. Variable annuities
They’re complex and too expensive to offer any real benefit. I’ve worked with a lot of clients who previously were sold these and I’ve yet to meet one who (a) knew why they bought it, (b) understood what they owned, or (c) knew what their options were. Stay away.
However, a single-premium income annuity is a different animal and may make good sense in retirement.
2. Whole life insurance
It’s a confusing bundle of term life insurance and forced savings. Like many bundles, it combines something you need with something you don’t want. Buy the term life insurance you need and save your money in one of the better ways I mentioned above.
3. Bitcoin and anything else crypto-sounding
It’s never a good idea to invest in something you don’t understand as it usually leads to the intersection of heartache and regret.
4. Metals
There’s also no clear intuition for why precious metals should appreciate over time beyond their industrial value, especially compared to other investments such as stocks, bonds, and commercial real estate. Instead of receiving interest or dividends, you’re paying for storage, insurance, shipping, and other transaction costs.
5. Your brother-in-law’s latest no-lose investment scheme
You may end up on another road to heartache and regret. Investing in the family business is rarely a good financial move.
But, if you must, limit these “non-traditional” investments to less than 5% of your overall net worth.
6. Lottery tickets, sports betting, and other gambling
Save these for your entertainment budget; but, if you must, go to the casino where the odds may be slightly better and the drinks are usually free.
There’s no time like the present to save more.