Q&A: Where to Stash Extra Savings?

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I recently received the following reader question:

I am already saving enough in my 401(k) to receive my employer match.

I am also fully funding my Roth IRA contributions using your Gone Fishing Portfolio asset allocation.

I have paid off all my high interest debt; I only have a low interest rate car loan (2.4%) and a mortgage (3.5%).

I am working on building a 3-month of expenses emergency fund in my taxable brokerage account.

However, after all this savings, I have about $3,000 per month left to save somewhere. Should I max out my 401(k) contribution? Invest it in my brokerage account? Pay off my car loan?

Any ideas would be appreciated.

As we have written previously in “Which Retirement Account Should I Fund?,” in general we recommend the following savings order:

  1. Fund your 401(k) or 403(b) if you have a match.
  2. Fund your Roth IRA or Backdoor Roth.
  3. Fund your Roth 401(k) or 403(b) more.
  4. Contribute to your SEP IRA.
  5. Consider a traditional IRA or 401(k)/403(b).
  6. Save in your brokerage account.

Following this savings chart, the next step for you would be to max your 401(k), preferably Roth 401(k).

That original article was focused on retirement accounts. If you broaden the scope to all accounts, you should also consider funding a Health Savings Account (HSA) to the maximum if you have access to one. Because you get a federal deduction when you contribute and the withdrawals are tax-free for qualified medical expenses, you should consider funding your HSA at the same time as you are considering your Roth IRA, during #2 of the list above. Most of us will have qualified medical expenses at some point, if not an amount every year, making it a great account even for short-term savings.

On the topic of emergency fund, you mentioned that you are working to build a pool of assets valued at three months of your expenses. We recently completed a series called “How to Budget for Emergencies.” In the series, we recommend that, instead of budgeting for emergencies using a fixed dollar amount, you constantly budget for financial surprises by setting aside 10% of your take home pay each month in an Unknown Budget. We recommend that you keep this Unknown Budget as fully invested as possible.

If fully funding your retirement accounts seems like it is at odds with maintaining your 10% Unknown Budget, it is okay for your unknown budget to move into your Roth IRA. We recommend fully funding your Roth IRA even when you can’t afford it because you can always withdraw whatever you contribute to a Roth IRA without tax or penalty. Furthermore, you can withdraw from the so-called earnings portion without penalty so long as you have had a Roth IRA open for at least five tax years and meet one of the exceptions or circumstances.

On the topic of car loans, at a low interest rate of only 2.4%, you should, on average, be able to grow more wealth investing than by paying down the loan to avoid the interest. However, short time period investment returns are very volatile. There is no guarantee you will come out head. Because the interest rate is only slightly more than current inflation (which is averaging right around 2% now), I would personally elect to pay only the minimum and invest the extra.

Hope this helps!

Photo by Amy Parkes on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine

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