Key points
- There are many options for saving and investing, including 401(k) accounts, IRAs, Health Savings Accounts (HSAs), and 529 College Savings plans.
- Each account type has its own tax benefits, contribution limits, and withdrawal rules, which can make it challenging to decide where to save first.
- The “Savings waterfall” worksheet summarizes the main features of each account type and is designed to help families prioritize savings based on earnings, savings strategy, available benefits, and financial goals.
- Building an emergency fund is typically the first step, with many families choosing to set aside resources to cover six to twelve months of expenses to help manage unexpected costs or temporary income disruptions.
- After establishing an emergency fund, the worksheet highlights options that may offer greater after-tax return potential. For example, contributing enough to a 401(k) to receive the full company match may provide an immediate benefit, as employer matching is an additional contribution in a tax-advantaged account.
- As savings increase, families can consider allocating additional resources to other account types further down the waterfall.
- Families may wish to review the savings waterfall with a financial advisor to develop a strategy that aligns with their specific needs and objectives. Setting up automatic deposits and investments can help ensure that savings are invested consistently.
